financial services future regulatory framework review
TRANSCRIPT
Financial Services Future
Regulatory Framework Review: Proposals for Reform
November 2021 CP 548
Financial Services Future Regulatory Framework Review: Proposals for Reform
November 2021 CP 548
Presented to Parliament by the Economic Secretary to the Treasury by Command of Her Majesty
© Crown copyright 2021
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Contents
Foreword 2
Executive summary 4
Chapter 1 Introduction 10
Chapter 2 Consultation response overview 23
Chapter 3 Objectives and principles 30
Chapter 4 Relationship with HM Treasury 37
Chapter 5 Accountability to Parliament 44
Chapter 6 Stakeholder engagement and the policymaking process 48
Chapter 7 A comprehensive FSMA model 57
Chapter 8 Responding to this consultation and next steps 68
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Foreword
Financial services is one of the UK’s most vibrant, innovative and important
industries. As Economic Secretary, my role is to deliver on the government’s vision
for an open, green, and technologically advanced financial services sector. A sector
that is globally competitive and acts in the interests of communities and citizens,
creating jobs, supporting businesses and powering growth across the UK.
The UK’s leadership and innovation in financial services goes back over 400 years:
the first paper banknotes, the first regulated stock exchange, and even the first
ATM. And following the global financial crisis in 2008, the UK was instrumental in
driving the reforms to improve the global financial system and has demonstrated an
ongoing commitment to high regulatory standards.
Taking advantage of the UK’s new freedoms now we have left the EU, the
government wants to build upon our historic strengths to renew the UK’s position
as the world’s pre-eminent financial centre.
The Future Regulatory Framework (FRF) Review will therefore play a critical role in
delivering the vision for the sector set out by the Chancellor in his speech at
Mansion House in July 2021. The FRF Review provides a once-in-a-generation
opportunity to ensure that, having left the EU, the government maintains a
coherent, agile, and internationally-respected approach to financial services
regulation that is right for the UK.
The previous consultation on the FRF Review, issued in October 2020, received over
120 responses and has been the subject of significant engagement with
stakeholders over the last 12 months. I am extremely grateful to everyone who
engaged with the previous consultation, and would like to thank Parliamentary
colleagues, market participants, consumer groups and other interested stakeholders
for their enthusiastic response.
This consultation builds on the previous one, sets out the government’s proposals
for important changes to the UK’s financial services regulatory framework, and seeks
to build on the strengths of the UK’s existing model of regulation established by the
Financial Services and Markets Act 2000 (FSMA). The proposals include changes to
the regulators’ statutory objectives and enhanced mechanisms for accountability,
scrutiny and oversight of the regulators by Parliament, HM Treasury and
stakeholders. It also sets out how we intend to return responsibility for designing
and implementing regulatory requirements to the UK regulators, a break from the
approach under EU law.
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This is an important moment for financial services regulation in the UK. I believe that
these proposals will support our ambition to ensure that, at home and abroad, the
UK’s financial services sector is recognised as the most trusted and competitive in
the world. I would urge all interested stakeholders to continue to share your views,
and I look forward to further engagement on these important issues.
John Glen MP
Economic Secretary to the Treasury
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Executive summary
Overall approach 1. The Future Regulatory Framework (FRF) Review was established to determine
how the financial services regulatory framework should adapt to the UK’s new
position outside of the European Union (EU), and how to ensure the
framework is fit for the future. In particular, the FRF Review provides an
important opportunity to ensure that the UK maintains a coherent, agile, and
internationally-respected approach to financial services regulation that delivers
appropriate protections and promotes financial stability.
2. The current model of regulation was introduced by the Financial Services and
Markets Act 2000 (FSMA). The FSMA model delegates the setting of
regulatory standards to expert, operationally-independent regulators, the
Prudential Regulation Authority (PRA) and the Financial Conduct Authority
(FCA), that work within an overall policy framework set by government and
Parliament.
3. The FSMA model was adapted to address the regulatory failings that
contributed to the 2007-08 global financial crisis. The Financial Services
Authority was split into the PRA and the FCA. The FCA was given the strategic
objective to ensure that the relevant markets functions well. The PRA was
given the general objective to promote the safety and soundness of PRA-
authorised persons. In addition, there were reforms to the Bank of England,
most notably the creation of the Financial Policy Committee.1
4. The government believes that this model remains the most appropriate way to
regulate financial services in the UK. It ensures that the regulators’ real-world,
day-to-day experience of supervising financial services firms is central to the
regulatory policymaking process. It also provides flexibility for the regulators to
update standards efficiently in response to changing market conditions and
emerging risks. Responses to the Future Regulatory Framework Review (FRF):
Phase II Consultation2 published in October 2020 demonstrated that
establishing a comprehensive model of regulation based on FSMA, with the
appropriate enhancements, is overwhelmingly supported by stakeholders.
Consultation respondents agreed with the government’s view that the UK’s
FSMA model is world-leading and that no alternative model provided a
preferable approach to financial services regulation.
1 These reforms were primarily delivered through the Financial Services Act 2012, Financial Services (Banking Reform) Act 2013, and
Bank of England and Financial Services Act 2016.
2 Financial Services Future Regulatory Framework Review: Phase II Consultation, HM Treasury, 2021.
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5. The UK’s approach to regulation is internationally respected with the UK
continuing to be a thought leader in the development of international
standards for financial services. As observed by IMF studies,3 when
independent regulators make judgements on the design of regulatory
standards, they are likely to deliver more predictable and stable regulatory
approaches over time.
6. As set out in the previous consultation published in October 2020, the PRA
and the FCA remain the right institutions to deliver the UK’s financial services
regulatory framework. In addition, the government is not proposing to alter
the macroprudential elements of the UK’s regulatory framework, so the
Financial Policy Committee is not within scope of the changes proposed in this
document.4
Objectives and principles 7. In the strategy document published alongside the Chancellor’s Mansion House
speech in July 2021,5 the government affirmed that the UK will continue to
promote high international standards. Robust regulatory standards are the
cornerstone of the attractiveness of the UK’s markets, and the stability and
soundness of the UK’s financial system is an important priority for the
government.
8. However, the FRF Review provides the opportunity to ensure that, having left
the EU, the government establishes a coherent, agile and internationally-
respected approach to financial services regulation that is right for the UK.
9. While the UK was a member of the EU, the government was able to ensure
that matters of wider public policy, such as growth and international
competitiveness, were considered as part of the negotiations to agree
regulations at an EU level. As the regulators take on greater responsibility for
setting detailed rules across a larger portion of the UK’s financial services
landscape, the government recognises the need to ensure that their objectives
reflect the importance of the financial services sector as an engine of growth
for the wider economy and the need to support the future strength and
viability of the UK as a global financial centre.
10. The government therefore intends to provide for a greater focus on growth
and competitiveness by introducing new, statutory secondary objectives for
the PRA and the FCA.
11. The government also proposes to amend the existing regulatory principles to
ensure that sustainable growth should occur in a way that is consistent with
the government’s commitment to achieve a net zero economy by 2050.
3 Should Financial Sector Regulators be Independent?, Marc G Quinyn, 2004.
Financial Regulators Need Independence, Udaibir S. Das, Marc Quintyn and Michael W. Taylor, 2002.
4 Actions taken by the regulators to implement directions and recommendations made by the FPC will therefore have specific carve-
outs from both the overarching and activity-specific accountability mechanisms proposed here, as they are already subject to the
FPC’s existing framework of objectives and accountability.
5 A new chapter for financial services, HM Treasury, July 2021.
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Retained EU law 12. In the years since FSMA was introduced, and in particular following the global
financial crisis and the growth of the single market in the EU, EU financial
services regulation has expanded into new areas, and become significantly
more detailed, which has affected the operation of the FSMA model. In
particular, EU regulations complicated the split of responsibilities established
by FSMA. They constrained the regulators’ ability to determine the most
appropriate regulatory requirements for UK markets, and required them to
apply EU regulations and operate within the EU framework.
13. The body of EU legislation that applied directly in the UK at the point of exit
was transferred onto the UK statute book by the European Union
(Withdrawal) Act 2018. This is known as “retained EU law”.
14. This approach to retained EU law has left the UK with detailed regulatory
requirements in primary and secondary legislation, which should under a
FSMA approach primarily be in the regulators’ rules. The effect of having these
regulatory requirements in legislation is that it is difficult and time-consuming
to update, and places substantial resource pressures on Parliament which is
asked to consider a large volume of highly technical provisions. For example,
the Markets in Financial Instruments Regulation sets percentage caps on how
much trading volume can happen outside of a trading venue.
15. The government intends to move to a comprehensive FSMA model of financial
services regulation, with the appropriate enhancements to ensure that the
regime remains fit for the future, and can support the UK’s high standards of
regulation. This means that the financial services regulators will take
responsibility for setting many of the direct regulatory requirements which are
currently set out in retained EU law. Direct regulatory requirements are the
obligations that firms are expected to follow, with the framework within
which the regulators must operate being set by Parliament and the
government. Regulation in financial services is evolving all the time, with new
developments and technologies requiring regular amendments. Empowering
the regulators to set the direct regulatory requirements will allow for the
necessary evolution of the rulebook, in a way that maintains the UK’s high
standards of regulation. Transferring that responsibility to the regulators will
require the government to gradually repeal significant amounts of retained EU
law so that the regulators can replace it with the appropriate regulatory
requirements in their own rulebooks.
16. FSMA already gives the regulators extensive rulemaking powers, and in many
cases deleting the relevant retained EU law will allow the provisions to be
replicated in the regulators’ rulebooks. However, the regulators’ existing
rulemaking powers are not sufficiently broad to allow them to make rules
covering all areas of financial services regulation currently in retained EU law.
This is because many activities, particularly since the financial crisis, were
brought into regulation through direct EU legislation rather than by
expanding the regulators’ powers under FSMA. Where this is the case, the
government proposes to provide the regulators with the necessary additional
powers to make rules relating to those matters currently in retained EU law.
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17. As part of this, the government is considering granting the Bank of England
general rulemaking powers over central counterparties (CCPs) and central
securities depositories (CSDs), where they currently have only limited
rulemaking powers. This will be accompanied by appropriate enhancements
to the Bank of England’s current framework of objectives and accountability in
relation to the regulation and supervision of these entities. The government
will set out further details in due course.
18. In many instances, the government would expect the regulators to initially
replace the repealed provisions with rules that are similar to those which are
currently in place. However, this approach will allow the regulators to ensure
that the rules are properly tailored for the UK markets, and appropriately
reflect their objectives. It will also mean that the rules can be more efficiently
updated in the future, for example in response to new global standards, or to
take account of new business models.
19. Delivering these changes will be a significant undertaking, and each piece of
relevant retained EU law will need to be addressed individually in order to
move to an approach that is consistent with the FSMA model of regulation
once the necessary primary legislation is in place. That means that many of the
necessary changes will be delivered through an extensive programme of
secondary legislation, which is likely to take several years. This means that
Parliament will have the opportunity to scrutinise the legislation which enables
these changes, and subsequently the statutory instruments giving effect to the
changes.
Accountability, scrutiny and engagement 20. With the regulators taking on these significant new regulatory policymaking
responsibilities, it is important that both the mechanisms by which Parliament
hold the regulators to account, and the mechanisms underpinning the
regulators’ relationship with HM Treasury, are strengthened. This will ensure
there continues to be appropriate democratic input into, and public oversight
of, the regulators’ activities.
21. The government considers that Parliament has a wide range of powers to
request information and conduct effective scrutiny of the regulators, including
through the select committee system. To support this work, the government
proposes formalising through statute the mechanisms through which the
regulators provide information to Parliament to ensure they have the
information they need to undertake that scrutiny.
22. The government also proposes to strengthen the engagement mechanisms
that exist between HM Treasury and the regulators. This will be achieved
through a new requirement for the PRA and the FCA to respond to the
recommendations letters issued by HM Treasury, and a new power for HM
Treasury to require the regulators to review their existing rules where the
government considers that it is in the public interest.
23. In addition, the government considers that there is now a case for ensuring
the regulators consider the potential impacts on deference arrangements and
assess compliance with relevant trade agreements, as a matter of course when
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making rules and when setting general policy on supervision, where relevant
and proportionate. The government therefore proposes introducing new
accountability mechanisms requiring the regulators consider to the impact of
exercising their powers to make rules and set general approaches and policy
on supervision upon the UK’s deference arrangements, and to assess
compliance with relevant trade agreements with overseas jurisdictions.
24. These measures seek to ensure that, as the independent regulators take on
more responsibility for regulatory policymaking under the proposed approach,
they can continue to be held to account by Parliament and HM Treasury for
how they are advancing their objectives.
25. It is vital that there are opportunities for consumers, relevant stakeholders and
firms to engage with and scrutinise the development of regulatory proposals.
Any policymaking process risks being deficient if it does not draw sufficiently
on the views, experience and expertise of those who may be impacted by
regulation. The government considers that the existing primary method for
this engagement, the regulators’ requirement to consult publicly on their draft
rules, remains the key mechanism for this engagement.
26. The government also acknowledges that the regulators’ statutory panels – an
important part of the process through which stakeholders can feed in views
on proposals – will be able to provide earlier input into the regulatory
policymaking process now that the UK is responsible for all regulatory
policymaking outside the EU. The government therefore also proposes to
require the regulators to publish a statement on their approach to the
recruitment of panel members, to ensure that their membership represents a
truly diverse range of stakeholder views. In addition, the government proposes
to put the FCA’s Listing Authority Advisory Panel and the PRA Practitioner
Panel’s insurance sub-committee on a statutory footing, in line with the PRA’s
and FCA’s other panels. The purpose and structure of these panels is
summarised later in this document.
27. To support these existing avenues for engagement, the government is also
introducing proposals to support greater transparency of the regulators’
processes, and to strengthen their approach to cost-benefit analysis (CBA).
CBA is an important part of the regulators’ policymaking process. It helps the
regulators to understand the likely impacts of a policy, and to determine
whether a proposed intervention is proportionate. The government is
therefore proposing the creation of a new statutory panel designed to review,
and make recommendations on, the regulators’ production of CBA in order to
improve the processes. The focus on greater transparency will also be
delivered through new requirements for the regulators to publish and
maintain public frameworks that set out their approach to reviewing their
rules and conducting CBA. These frameworks will offer stakeholders an
opportunity to familiarise themselves with, and input into, these important
processes, introducing greater transparency of when and how the regulators
review their rules and conduct CBA.
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Previous consultation 28. The approach set out in this consultation meets the objectives of the FRF
Review outlined in the previous consultation from October 2020, which are:
• clear, coherent and effective allocation of regulatory responsibilities –
The proposed approach will provide a clear split of responsibilities. The
proposal will allow the government and Parliament to set the overall
policy framework and hold the expert regulators to account for how
they advance these objectives and operate within that framework
• appropriate policy input by democratic institutions – The proposed
approach aims to build on the existing structures and improve
accountability. Moving to a comprehensive FSMA model of financial
services regulation in the UK, with the appropriate enhancements to
the framework, the government and Parliament will be able to ensure
that relevant policy issues must be considered by the regulators when
they design their regulatory requirements
• clearer basis for effective accountability and scrutiny – The proposed
approach is designed to support more effective accountability, scrutiny
and engagement of the regulators by Parliament, HM Treasury, and
relevant stakeholders. This includes proposed measures to ensure
greater transparency at each stage of the regulatory process and
appropriate democratic oversight of the regulatory framework
• agile regulatory regime – Moving to a comprehensive FSMA model of
financial services regulation will ensure that direct regulatory
requirements which apply to firms will be set through regulator rules,
which can be updated in an agile and responsive way to take account
of changing market conditions, address emerging risks, and facilitate
innovation
• coherent and more user-friendly regime for end-users – Following our
departure from the EU, the direct regulatory requirements which apply
to firms are set out in a number of places, including retained EU law.
This approach aims to bring about, as much as possible, a single
source of requirements for firms – the regulators’ rulebooks
• internationally-respected approach – As a global hub for financial
services, a regulatory approach which commands confidence
internationally is a priority for the UK. The proposed approach of
delegating responsibility for regulatory requirements to regulators
operating independently from government is supported by the IMF
and OECD
29. This approach for financial services regulation is consistent with the
government’s broader vision for Better Regulation, set out in its consultation
of 22 July 20216, which builds on the recommendations of the Taskforce for
Innovation, Growth, and Regulatory Reform.
6 Taskforce on Innovation, Growth and Regulatory Reform independent report, Taskforce on Innovation, Growth and Regulatory
Reform (TIGRR), June 2021.
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Chapter 1
Introduction
Context 1.1 The Future Regulatory Framework (FRF) Review was announced by the then
Chancellor of the Exchequer at Mansion House on 20 June 2019, with the
objective of reviewing the UK’s financial services regulatory framework to
ensure it is fit for the future. The Review represents an important
opportunity, following the UK’s departure from the European Union (EU), to
ensure that the financial services regulatory framework reflects the UK’s new
position and supports delivery of the government’s vision for the financial
services sector.
1.2 The UK’s regulatory framework sets the overall approach to regulation of
financial services, and establishes the institutional architecture needed to
operationalise the regulatory regime.
1.3 The operation of the UK’s financial services regulatory framework was heavily
influenced by the UK’s membership of the EU. Now that the UK has left the
EU, it is necessary to consider how important policy and regulatory functions
previously carried out at the EU level will be exercised, and to ensure a
standalone UK regime is fit for the future.
Vision for the financial services sector 1.4 In his speech at Mansion House on 1 July 2021, the Chancellor of the
Exchequer set out the government’s vision for an open, green, and
technologically advanced financial services sector that is globally competitive
and acts in the interests of communities and citizens, creating jobs,
supporting businesses, and powering growth across all of the UK. The
Chancellor also reaffirmed the government’s commitment to maintaining
high regulatory standards. Alongside the Chancellor’s speech, the
government published a document, A new chapter for financial services,1
setting out the vision in detail.
1.5 A key part of this vision is the government’s commitment to maintain and
build on the UK’s attractive and internationally-respected ecosystem for
financial services across both regulation and tax. The government intends to
tailor its approach to reflect the UK’s new position outside the EU, while
ensuring it supports and promotes the interests of UK markets and maintains
1 A new chapter for financial services, HM Treasury, July 2021.
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high regulatory standards in the face of new and evolving risks. The FRF
Review is a key pillar of delivering this vision, as it considers the UK’s overall
approach to financial services regulation. It also complements a number of
further reviews and initiatives that are underway on specific areas of financial
services regulation intended to support and encourage growth in the UK as a
global financial services hub, while maintaining high regulatory standards.
These include the government’s reviews looking into the prudential regime
for insurers, wholesale capital markets and the UK funds regime.
Previous consultation and debate on the FRF 1.6 The first stage of the FRF Review in 2019 examined coordination between
the UK authorities that have responsibility for the regulation of the financial
services sector. The government published its response on 11 March 2020,
announcing that the regulators would set up the Financial Services
Regulatory Initiatives Grid and Financial Services Regulatory Initiatives Forum.
This was intended to provide a clear picture of expected regulatory activity to
help regulators, firms and consumer stakeholders plan ahead, and improve
proportionality, co-ordination and transparency across the regulatory
landscape for financial services, reducing the operational burden on industry.
The Regulatory Initiatives Forum has now published four iterations of the
Regulatory Initiatives Grid.
1.7 The government also stated in its response to the first stage of the FRF
Review that there is a broader set of issues concerning the regulatory
framework that need to be addressed. Operation of the UK framework had
evolved to accommodate the UK’s membership of the EU. The UK’s
withdrawal from the EU means that it needs to decide how important policy
and regulatory functions carried out at the EU level will be exercised in a
standalone UK regime. Leaving the EU means that the UK has taken back
control of the rules governing our world-leading financial services sector, so
the FRF Review is an opportunity to adapt our regulatory approach to meet
the specific needs of the UK.
1.8 The government published an initial consultation2 exploring these key issues
in October 2020 and set out an overall approach to financial services
regulation, focusing on the split of responsibilities between Parliament, the
government and the financial services regulators, and seeking to build on the
strengths of the Financial Services and Markets Act 2000 (FSMA) model.
1.9 In addition to the government’s consultation on the FRF Review, which
closed in February 2021, there has been continued debate among interested
stakeholders including:
• Debate in Parliament throughout the passage of the Financial Services
Act 2021 (FS Act 2021), where Members of both Houses endorsed a
model for the prudential regulation of banks and investment firms
where the regulators set direct regulatory requirements which apply to
2 Financial Services Future Regulatory Framework Review: Phase II Consultation, HM Treasury, 2021.
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firms, within the overall FSMA framework set by Parliament. This is in
line with the proposed approach set out in this consultation
• Throughout passage of the FS Act 2021, Members of both Houses
debated the regulators’ accountability mechanisms – particularly in
relation to Parliament – as well as the regulators’ statutory objectives
and regulatory principles. The government’s position throughout these
debates was that the appropriate forum to consider such issues was
through the FRF Review, which looks at the question of financial
services regulation in the round, rather than the FS Act 2021
• Reports from the Treasury Select Committee (TSC)3 and the All-Party
Parliamentary Group (APPG) for Financial Markets and Services,4 which
considered the approach outlined in the government’s October
consultation and made recommendations to government and
Parliament
• Lord Hill’s report on the UK’s listings regime,5 which included (amongst
other issues) a recommendation for the government to consider the
case for amending the Financial Conduct Authority (FCA)’s statutory
objectives to include a ‘competitiveness’ or ‘growth’ requirement
• The report from the Taskforce on Innovation, Growth and Regulatory
Reform (TIGRR)6 and its recommendations to ensure that the UK’s
regulatory framework effectively supports innovation and growth
Financial services legislation
The FSMA model 1.10 The UK’s financial services system is underpinned by the framework set out
in FSMA, and in the previous consultation the government consulted on the
proposal to move to a comprehensive FSMA model of financial services
regulation.
1.11 As described in the previous consultation, the FSMA model has changed
over time. The financial crisis of 2007-08 revealed serious flaws in the UK’s
system of regulation, particularly in the allocation and coordination of
responsibilities across the ‘tripartite’ institutions – HM Treasury, the Bank of
England, and the Financial Services Authority (FSA). The Bank of England had
inadequate tools to play its role in ensuring financial stability; the FSA’s
responsibilities were too broad to allow for sufficient focus on the stability of
firms; and no part of the framework had responsibility for monitoring the
3 The Future Framework for Regulation of Financial Services, House of Commons Treasury Committee, July 2021.
4 The Role of Parliament in the Future Regulatory Framework for Financial Services, All-Party Parliamentary Group on Financial
Markets & Services, February 2021.
5 UK Listing Review, Lord Hill, March 2021.
6 Taskforce on Innovation, Growth and Regulatory Reform independent report, Taskforce on Innovation, Growth and Regulatory
Reform (TIGRR), May 2021.
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crucial link between the stability of individual firms and the stability of the
financial system as a whole.
1.12 The post-crisis reforms were therefore focused on institutional design and
allocation of responsibilities, with the FSA abolished and replaced with the
Prudential Regulation Authority (PRA) and FCA. The PRA was made
responsible for the prudential regulation of firms which manage significant
balance sheet risk, and the FCA was made responsible for the regulation of
conduct. In addition, there were reforms to the Bank of England, most
notably the creation of the Financial Policy Committee.
1.13 However, successive governments have always maintained the same
approach to setting the framework for financial services regulation, which is
referred to in this consultation as the FSMA model. The FSMA model splits
responsibilities across Parliament, HM Treasury, and the regulators as
follows:
• Parliament, through primary legislation, sets the overall approach and
institutional architecture for financial services regulation, including the
regulators’ objectives;
• Parliament establishes the parameters within which HM Treasury sets
the ‘regulatory perimeter’ through secondary legislation, specifying
which financial activities should be regulated and the circumstances in
which regulation should apply;
• the expert and operationally-independent regulators have the statutory
responsibility for setting the direct regulatory provisions that apply to
firms which carry out regulated activities, using the powers given to
them by FSMA, and following the processes established by FSMA;
• Parliament, through FSMA, sets the statutory objectives for the
regulators, with requirements set in legislation to ensure appropriate
accountability to Parliament, HM Treasury, and the general public
1.14 FSMA establishes a framework whereby any person (whether an individual or
firm) can only carry out a regulated activity if it is authorised by the
appropriate regulator (i.e. is an “authorised person”) or is exempt. Under this
framework, HM Treasury determines which activities are regulated activities,
by specifying activities to be regulated in the Financial Services and Markets
Act 2000 (Regulated Activities) Order 2001 (RAO).
1.15 Firms wishing to carry out a regulated activity must apply to the appropriate
regulator for authorisation to do so, and the regulator must assess
applications in line with the requirements established in FSMA, such as
threshold conditions, which can include considerations of suitability and
business models.
1.16 FSMA empowers the PRA and the FCA to make rules which apply to
authorised persons. The regulators are required to maintain arrangements
for supervising authorised persons, and FSMA gives them powers to monitor
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and enforce compliance with the rules. Both the FCA7 and the PRA8 publish
their approach to supervision and enforcement.
Regulatory objectives and principles 1.17 FSMA sets objectives for the PRA and the FCA and requires them to act in a
way that advances their objectives when carrying out their general functions.
This determines what the regulators must seek to advance when they make
rules, set technical standards, and issue guidance.
1.18 The FCA’s strategic objective is to ensure that the relevant markets function
well. Its operational objectives are to secure an appropriate degree of
protection for consumers, protect and enhance the integrity of the UK
financial system, and to promote effective competition in the interests of
consumers.
1.19 The PRA’s general objective is promoting the safety and soundness of PRA
authorised persons; it also has an insurance-specific objective of contributing
to the securing of an appropriate degree of protection for those who are, or
may become, policyholders. The PRA also has a secondary objective to
facilitate effective competition in the markets for services provided by PRA-
authorised persons in carrying on regulated activities.
1.20 The FSMA regulatory principles aim to promote regulatory good practice
across the range of the regulators’ policymaking. The regulators must take
into account 8 regulatory principles when discharging their functions, which
are:
• efficiency and economy - the need to use the resources of each
regulator in the most efficient and economic way
• proportionality - the principle that a burden or restriction which is
imposed on a person, or on the carrying on of an activity, should be
proportionate to the benefits, considered in general terms, which are
expected to result from the imposition of that burden or restriction
• sustainable growth - the desirability of sustainable growth in the
economy of the UK in the medium or long term
• consumer responsibility - the general principle that consumers should
take responsibility for their decisions
• senior management responsibility - the principle that a regulated firm’s
senior management is responsible for ensuring that its business
complies with regulatory requirements imposed by or under FSMA,
including those affecting consumers
• recognising differences in business - the desirability where appropriate
of each regulator exercising its functions in a way that recognises
7 FCA Mission: Approach to Enforcement, Financial Conduct Authority, April 2019.
8 The Prudential Regulation Authority’s approach to enforcement: statutory statements of policy and procedure, Bank of England,
September 2021.
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differences in the nature of, and objectives of, different businesses
subject to requirements imposed by or under FSMA
• openness and disclosure - the desirability in appropriate cases of each
regulator publishing information relating to persons on whom
requirements are imposed by or under FSMA, or requiring such
persons to publish information, as a means of contributing to the
advancement by each regulator of its objectives
• transparency - the principle that the regulators should exercise their
functions as transparently as possible
Parliamentary oversight 1.21 As Parliament sets the regulators’ objectives and gives them the powers to
pursue those objectives, Parliament rightly has a unique and special role in
relation to the scrutiny and oversight of the financial services regulators. The
regulators, when exercising these powers, make regulatory decisions
independently from government and Parliament. However, Parliament has
the right to require the regulators to explain and justify those decisions.
1.22 The system of Parliamentary select committees is particularly important in
financial services policy and in relation to the scrutiny of the work of the
regulators. Relevant select committees, and the Treasury Select Committee
(TSC) in particular, provide scrutiny of financial services policy in the
following ways:
• Select committee inquiries – Committees choose their own subjects of
inquiry and decide the duration and approach that will be used for
each inquiry. The committees have the power to send for “persons,
papers and records” which they decide will be relevant. Witnesses
asked to give evidence to an inquiry relating to financial services can
include Treasury ministers and senior officials as well as senior officials
from the financial services regulators. The TSC has undertaken many
high-profile and influential inquiries, and senior representatives from
the regulators frequently appear before the TSC in the course of its
inquiries. Other committees, such as the former House of Lords EU
Financial Affairs Sub Committee and the House of Commons European
Scrutiny Committee, have also played a key role in scrutinising financial
services policy, and the government expects that the recently formed
Industry and Regulators Committee, part of whose remit is to scrutinise
the work of UK regulators, will play an increasingly important role.
• Regular hearings to scrutinise the work of the financial services
regulators – the TSC routinely examines the regulators’ approach to
policy and administration. As part of this work, senior officials from the
regulators attend general accountability hearings - for instance the FCA
Chair and Chief Executive appear before the TSC biannually and the
PRA appears before the TSC after the publication of each annual
report. The regulators also provide both written and oral evidence to
select committees in both the Lords and Commons on the wide range
16
of issues that they cover, and routinely provide evidence and expertise
to Bill committees and in policy meetings with MPs and Peers.
• Pre-commencement hearings – Parliament, through the TSC, conducts
these pre-commencement hearings following the appointment of the
Chair and Chief Executive of the FCA and the Chief Executive of the
PRA. Where the Committee does not wish to recommend the
appointment of the FCA Chief Executive, it can recommend that it be
put to a vote on the floor of the Commons.
1.23 There are also long-established scrutiny arrangements in place for Parliament
to hold Ministers of the Crown accountable for the work of HM Treasury and
the UK’s financial services regulators.
Accountability to HM Treasury 1.24 Treasury ministers have overall responsibility for the UK’s financial services
regulatory framework and the continued effective operation of the financial
services regulators as part of that framework. Treasury ministers can
therefore be regarded as having a constitutional duty to ensure the
regulators operate effectively and in accordance with framework. Acting
within their FSMA statutory powers, and in accordance with relevant
provisions in other financial services legislation, judgements on rulemaking
and supervision are for the regulators to make. Ministers and officials
therefore meet regularly with the regulators to discuss policy issues and
areas of joint work or interest, while recognising the regulators’ operational
independence.
1.25 Existing legislation already provides a number of formal accountability
mechanisms between the regulators and HM Treasury in specific
circumstances:
• HM Treasury is responsible for appointing the Chair and the Chief
Executive of the FCA, and at least three members of the FCA’s
governing body, two of whom are appointed jointly by HM Treasury
and the Secretary of State9
• the Chancellor appoints ”at least” six members of the Prudential
Regulation Committee (PRC),10 the governing committee of the PRA
• HM Treasury may also remove appointed members from the FCA body
on certain specified grounds,11 and the Chancellor’s consent is required
for the removal of members of the PRC by the Bank12
9 FSMA, Schedule 1ZA, paragraph 2.
10 Bank of England Act 1998, section 30A.
11 FSMA, Schedule 1ZA, paragraph 4.
12 Bank of England Act 1998, schedule 6A, paragraph 9.
17
• HM Treasury may appoint an independent person to conduct a review
of the economy, efficiency and effectiveness of the FCA’s use of
resources13
• HM Treasury may direct the PRA or FCA to carry out investigations into
specific events if that is in the public interest14
• HM Treasury may direct the PRA or FCA to take action, or refrain from
taking action, in relation to specified matters in order to ensure that
the UK meets its international obligations15
• HM Treasury may require the FCA or PRA to comply with certain
statutory provisions on the keeping of accounts and audit16
1.26 In addition, FSMA provides HM Treasury with the ability to make
recommendations to the regulators through open ‘recommendations letters’
on issues related to matters of economic policy which the regulators should
take into account when discharging certain statutory duties.17 The most
recent recommendations letters for both the PRA18 and FCA19 were issued on
23 March 2021.
Rulemaking process
Approach to consulting with stakeholders
1.27 Engagement with stakeholders is embedded in the regulators’ policymaking
process through the application of statutory requirements and public law
principles. The PRA and the FCA are subject to statutory requirements in
FSMA which, in general, require them to consult with the public on rule
proposals.20 These PRA and the FCA consultations are generally open for
three months, though this can change depending on the issue – for
example, in case of emergency, consultations can be avoided or run for
significantly shorter periods.
1.28 As part of these consultation requirements, the PRA and the FCA must
explain why the making of the proposed rules is compatible with their
objectives as set by Parliament in legislation. The regulators must also explain
how the proposals are compatible with their obligation to take into account
the regulatory principles. Consultations on rule proposals must include a
draft of the rules, an explanation of the proposed purpose of the rules, and
a cost-benefit analysis (CBA).21 Before making final rules, the regulators are
13 FSMA, section 1S.
14 Financial Services Act 2012, section 77.
15 FSMA, section 410.
16 FSMA, Schedule 1ZA, paragraph 14 (FCA), and FSMA, Schedule 1ZB, paragraph 22 (PRA).
17 Bank of England Act 1998, section 30B (PRA), and FSMA, section 1JA (FCA).
18 Recommendations for the Prudential Regulation Committee: March 2021, HM Treasury, March 2021.
19 Recommendations for the Financial Conduct Authority: March 2021, HM Treasury, March 2021.
20 FSMA, sections 138I (FCA) and 138J (PRA).
21 There are a small number of exemptions set out in FSMA. For example, subsections of the FSMA requirement for compensation
scheme rules.
18
required to publish, in general terms, the representations made and their
response to those representations. These requirements are designed to
ensure consumers, market participants, and wider stakeholders have a
meaningful opportunity to scrutinise and feed into the development of
regulator policy, guidance and rules. The government considers that this
statutory general requirement to consult remains fit for purpose, and
therefore do not propose altering the regulators’ duty to publicly consult on
proposals.
Stakeholder panels
1.29 In addition to the duty to consult publicly on proposals, the FCA has a
general duty to “make and maintain effective arrangements for consulting
practitioners and consumers.”22 The PRA has a similar general duty to “make
and maintain effective arrangements for consulting PRA-authorised persons
or, where appropriate, persons appearing to the PRA to represent the
interests of such persons”, on the extent to which the PRA’s general policies
and practices are consistent with its general duties.23
1.30 As part of these duties, the regulators are required under FSMA to maintain
stakeholder panels as part of their general duties to consult. These panels are
intended to provide valuable insight, advice and challenge across the
regulators’ functions, drawing on the experience and expertise of their
respective memberships. Panel members are appointed by the regulators,
and the chairs are approved by HM Treasury. The regulators consult the
panels at an early stage in policy development to help ensure proposals are
designed to meet their policy aims. The PRA and the FCA consult these
panels on most major policy and regulatory interventions. The panels also set
out their own strategic priorities and share more broadly their views on
proposals, for example, through publishing responses to regulator
consultations and through their annual reports,24 which collate the key risks
and issues the Panels have considered over the previous year.
1.31 The FCA works with five independent panels. Four of these are required in
legislation25 with a further non-statutory panel (the Listing Authority
Advisory Panel) voluntarily maintained by the FCA.
• the FCA Practitioner Panel represents the interests of regulated firms
and provides input from the industry’s view. It also works with the FCA
to carry out its annual survey of stakeholder views of the FCA’s
performance as a regulator
22 FSMA, section 1M.
23 FSMA, section 2L.
24 Annual Report, 2020-2021, FCA Practitioner Panel, August 2021.
Annual Report, 2020-2021, FCA Markets Practitioner Panel, August 2021.
Annual Report, 2020-2021, FCA Smaller Business Practitioner Panel, August 2021.
Annual Report, 2020-2021, FCA Consumer Panel, August 2021.
PRA Practitioner Panel and insurance sub-committee – Annual Report 2020/21, PRA Practitioner Panel, June 2021.
25 FSMA, sections 1N-Q.
19
• the Smaller Business Practitioner Panel represents the interests of
smaller regulated firms
• the Markets Practitioner Panel provides input from the point of view of
financial market participants
• the Consumer Panel represents the interests of consumers
• the Listing Authority Advisory Panel (LAAP) advises the FCA on policy
issues that affect issuers of securities, and on policy and regulation
proposals from the FCA listing function
1.32 The PRA works with one statutory panel, the PRA Practitioner Panel,26 which
includes an insurance sub-committee that the PRA maintains voluntarily. The
panel represents the interests of industry practitioners from areas of financial
services activity that are subject to PRA regulation: deposit taking, insurance
and large or complex investment firms. The panel considers the PRA’s
policies and practices and provides input to help meet the PRA’s statutory
and operational objectives.
1.33 The regulators have regular meetings and discussions with their panels, in
which most major early policy and regulatory proposals are presented for
comment. The panels’ contributions to policy development as part of this
process are confidential to ensure both the regulator and panel members
can share ideas and feedback openly. This confidentiality allows the
regulators to engage the panels when policy is in the early stages of
development ahead of public consultation. This enables the panels to act as
a ‘critical friend’ to the regulator which the government considers should
continue. Where panels wish to comment on regulators’ proposals publicly,
they can and do publish their responses to the regulators’ public
consultations.27 They also discuss their work across the year in general terms
in the panels’ annual reports, raise potential issues with regulators, and
conduct their own research. They also occasionally set up sub-panels to deal
with specific technical issues.
1.34 The practitioner panels tend to be composed of senior executives or similar
with experience and a strategic perspective on their sectors which enables
the panels to offer strategic and qualitative input on the regulators’ high-
level proposals. The Consumer Panel is similarly made up of experienced
practitioners in the consumer sectors, such as academics, independent
consultants, and consumer advocates.
1.35 The regulators are responsible for appointing members and chairs to the
panels. The current appointment practices are varied and reflect the different
areas of expertise of the panels. The PRA’s Practitioner Panel and its
insurance sub-committee seek industry nominations. The FCA seeks input
from supervisory teams, and others as appropriate, for its appointments to
26 FSMA, section 2M.
27 For example:
Financial Services Consumer Panel response to CP 21/3 – Changes to the SCARTS: Contactless payments, FCA Consumer Panel,
February 2021.
SBPP Response to CP21/11: The Stronger Nudge to Pensions Guidance, FCA Smaller Business Practitioner Panel, June 2021.
20
the practitioner panels. The Consumer Panel has the most involved process,
with open recruitment for both the chair and individual members. HM
Treasury is required to approve the appointment and dismissal of panel
chairs (except for the LAAP and insurance sub-committee, as these are
voluntarily maintained by the regulators, and not covered by similar
requirements).
Impact of EU membership 1.36 In the years since FSMA was introduced, and in particular following the
global financial crisis, EU financial services regulation has expanded into new
areas and become significantly more detailed, which has affected the
operation of the FSMA model. The development of a single market in the EU
for financial services, as well as interventions to address regulatory failures of
the global financial crisis, resulted in EU legislation covering many key areas
of financial services regulation in significant detail. This complicated the split
of responsibilities that was established by FSMA, constraining the regulators’
ability to determine the most appropriate regulatory requirements for UK
markets, as they were required to apply EU requirements and operate within
the EU framework.
The UK’s withdrawal from the EU 1.37 The body of EU legislation that applied directly in the UK at the point of exit
was transferred onto the UK statute book by the European Union
(Withdrawal) Act 2018 (EUWA). Under the “onshoring” programme, HM
Treasury and the regulators undertook a significant programme of legislation
to ensure that the body of retained EU law relating to financial services
would operate effectively following our withdrawal from the EU, by making
the necessary amendments to address any deficiencies arising as a result of
exit or the end of the transition period. As part of the onshoring
programme, responsibility for making some types of delegated legislation
was transferred to the regulators – but the majority of financial services
regulation now sits on the UK statute book. This approach provided stability
and continuity in the immediate period after EU exit, but it was not designed
to provide the optimal, long-term approach for UK regulation of financial
services.
1.38 Retained EU law is defined in section 6(7) of the EUWA and includes “direct
EU legislation” which applied automatically in UK law such as Regulations or
Delegated Regulations, and both primary and secondary UK legislation
which implemented EU legal obligations into UK law. There are also many
statutory instruments made under the EUWA as part of the onshoring
programme which made substantial changes to retained EU law in order to
ensure that it operated effectively in the UK after exit, which this
consultation includes in this category. Finally, a number of EU obligations
were implemented directly into the rulebooks of the regulators. While these
rulebook provisions are also retained EU law, they are out of the scope of
21
this review as the regulators have responsibility for their own rulebooks,
which they are able to amend and update in the normal manner.
1.39 While retained EU law has been incorporated into the current framework, it
has complicated the current FSMA model, as many of the direct regulatory
provisions which apply to firms are now set out in retained EU law, rather
than in the rulebooks of the regulators. Much of this retained EU law can
only be amended through primary legislation, meaning that it is not possible
in many areas to regulate in an agile and flexible way that reflects changing
markets, as the FSMA model was designed to do.
Interactions and scope 1.40 The FRF Review focuses on how the UK’s framework for financial services
regulation needs to adapt now that the UK has left the EU. The government
has therefore not considered any changes to the current structure or
function of the existing complaints and compensation processes as part of
this review, including the regulators’ complaints scheme and the role of the
Independent Complaints Commissioner, the Financial Ombudsmen Service
(FOS) and the Financial Services Compensation Scheme (FSCS)
1.41 Anti-money laundering rules are also not within scope of the Review. This is
because anti-money laundering rules, and other linked areas such as
accounting and company law, apply to a much wider set of activities than
those captured by FSMA, and are enforced by the FCA along with a number
of other authorities, including HMRC, the National Crime Agency, and the
Serious Fraud office.
1.42 This Review has also not considered payment market participants that are
regulated domestically by the Bank of England and Payment Systems
Regulator, under the Banking Act 2009 and the Financial Services (Banking
Reform) Act 2013, rather than under retained EU law. HM Treasury will be
consulting separately on the regulatory perimeter for systemic payments
firms in the first half of next year, and will look to ensure coherence with the
principles and objectives of the FRF Review with respect to non-EU retained
payments legislation.
The purpose of this consultation 1.43 This document sets out the government’s response to the feedback received
in response to the previous consultation, taking into account the public and
Parliamentary debate. It sets out a series of proposals for how the
government intends to take forward its approach to the FRF Review,
including:
• the changes needed to the regulators’ statutory objectives and
regulatory principles to ensure the government’s priorities for the
sector are fully reflected across the breadth of the regulators’
responsibilities
22
• the proposals for ensuring that accountability, scrutiny and
engagement arrangements with HM Treasury, Parliament, and
stakeholders are appropriate given the regulators’ responsibilities
• the proposed approach to transferring responsibility for designing and
implementing the direct requirements that apply to firms in certain
areas of retained EU law to the regulators within a system established
by government and Parliament
1.44 The consultation sets out the government’s proposed approach to these
important issues, and seeks views on a number of key considerations within
them.
23
Chapter 2
Consultation response overview
2.1 The previous consultation was issued on 19 October 2020 and closed on 19
February 2021. It set out an overall approach to the regulation of financial
services, built on the existing FSMA model. This consultation asked for
responses on 9 key questions relating to the government’s proposals for the
regulatory regime. These questions requested views on: the operation of the
FSMA model and on the government’s proposed blueprint for change; the
function and suitability of the existing regulatory principles and statutory
objectives; alternative models and international comparisons the government
should consider; the government’s focus on updating accountability
mechanisms; the role of Parliament in scrutinising financial services policy;
how policy work between the regulators and HM Treasury should be
coordinated; and, how to ensure stakeholders are sufficiently involved in the
regulators’ policymaking processes.
2.2 The government is grateful for the 120 responses to the consultation and
the constructive engagement with stakeholders during the consultation
period. Respondents included financial services firms, consumer groups,
independent public bodies/regulatory bodies, legal and accountancy firms,
non-governmental organisations and non-profit organisations, trade
associations, individual responses, and non-financial services firms. The
consultation also received responses from several Parliamentarians.
2.3 This chapter provides a breakdown of the key themes raised by respondents
in response to the questions posed in the previous consultation.
24
Question 1- How do you view the operation of the FSMA model over the last 20 years? Do you agree that the model works well and provides a reliable approach which can be adapted to the UK's position outside of the EU?
Question 2- What is your view of the proposed post-EU framework blueprint for adapting the FMSA model? In particular-
What are your views on the proposed division of responsibilities between Parliament, HMT and the regulators?
What is your view of the proposal for high-level policy framework legislation for government and Parliament to set the overall policy approach in key areas of regulation?
Do you have any views on how the regulators should be obliged to explain how they have regard to activity specific regulatory principles when making policy or rule proposals?
2.4 The government set out a proposed blueprint for the future regulatory
framework which builds on the strengths of the FSMA model. A significant
majority of respondents supported the government’s proposal to move to a
comprehensive FSMA model of regulation as it provides a good foundation
that can be adapted to the UK’s position outside of the EU. However,
respondents noted that proposed changes set out in the initial consultation
would increase the regulators’ responsibilities, which meant that it would be
necessary to strengthen scrutiny and accountability mechanisms.
2.5 Respondents supported the proposed division of responsibilities between
Parliament, HM Treasury and the regulators. There was general support for a
model where the government and Parliament set the overall policy approach,
with the independent, expert regulators responsible for designing and
implementing the direct requirements that apply to firms.
Question 3- Do you have any views on whether and how the existing general regulatory principles in FSMA should be updated?
Question 4- Do you have any views on whether the existing statutory objectives for the regulators should be changed or added to? What do you see as the benefits and risks of changing the existing objectives? How would changing the objectives compare with the proposal for new activity specific regulatory principles? 2.6 The government set out that the overarching statutory objectives for the PRA
and the FCA set in FSMA are an effective way of ensuring appropriately
strong regulatory focus on the policy priorities of financial stability,
consumer protection, the integrity of financial markets and competition. The
25
government also set out that prioritising these policy aims remain vital to
ensure a stable and fair financial system. Respondents noted that the
regulators’ existing objectives have been broadly effective, with the general
view that the objectives of financial stability and consumer protection are
vital in maintaining the integrity and strength of the UK’s financial services
sector.
2.7 The government set out the ongoing debate amongst stakeholders and
Parliament on whether there should be an objective to support the
competitiveness of the UK sector. Many respondents shared their views on
having a greater focus on competitiveness within the regulatory framework.
Those in favour of a competitiveness objective or principle argued that a
greater focus on competitiveness as part of the regulatory framework was
necessary to support the ability of the UK financial services sector to compete
internationally and continue to contribute to the UK’s economic prosperity.
Some responses, including from groups representing consumers, suggested
that a competitiveness objective could distract from or dilute the regulators’
pursuit of their existing objectives. A limited number of respondents argued
for objectives or principles relating to innovation or economic growth to
improve the ability of the UK market to compete internationally.
2.8 Several respondents noted the specific need for a new regulatory objective or
principle relating to green or climate change issues. This was articulated in a
number of different ways, including requirements to ensure the finance
sector aligns with the Paris Agreement, supports wider climate change goals,
and contributes to the green finance strategy. This issue was also raised in
debates in Parliament during the passage of the Financial Services Act 2021,
where the government added the 2050 Net Zero target to the list of ‘have
regards’ in the prudential measures relating to Basel and the Investment
Firms Prudential Regime.
2.9 A small number of respondents indicated support for amending and
strengthening the regulators’ existing proportionality principle to reduce
regulatory burdens on firms. Some respondent supported inserting new
principles relating to financial inclusion and duty of care to increase the
regulators’ focus on harm to consumers.
Question 5- Do you think there are alternative models that the government should consider? Are there international examples of alternative models that should be examined? 2.10 The government set out that the FRF Review will see the regulators take on
increased responsibility for direct regulatory requirements which apply to
firms. This approach is supported by the academic literature on financial
regulation and by the International Monetary Fund (IMF) and the
Organisation for Economic Co-operation and Development (OECD).
Respondents agreed with the government’s view that the UK’s FSMA model
is world-leading and that no alternative model provided a preferable
approach to financial services regulation. However, respondents who argued
for a greater focus on competitiveness noted that some other jurisdictions
that use a similar model require their regulators to promote the
26
competitiveness of their markets internationally, in addition to their core
regulatory functions of ensuring financial stability and consumer protection.
Some respondents also discussed the role of the EU’s Committee on
Economic and Monetary Affairs (ECON) in providing scrutiny of regulator
rules. However other respondents considered that a similar model in the UK
would harm the regulators’ dynamism and agility.
Question 6- Do you think the focus for review and adaptation of key accountability, scrutiny and public engagement mechanisms for the regulators, as set out in the consultation, is the right one? Are there other issues that should be reviewed? 2.11 The government set out the existing arrangements for accountability,
scrutiny and public engagement and identified areas where these
arrangements might be adapted. There was broad support for HM Treasury’s
proposed focus on the split of responsibilities between Parliament, the
government and the financial services regulators. Some respondents argued
for more scrutiny and accountability of the regulators’ supervision and a
mechanism to challenge supervisory decisions.
2.12 A number of respondents noted that the FRF Review could also consider the
role of bodies which were not mentioned in the previous consultation, such
as the Financial Ombudsman Service (FOS) and the Financial Services
Compensation Scheme (FSCS). These respondents noted that the increasingly
important role of non-regulatory bodies like the FOS and the FSCS in the
financial services regulatory eco-system means they should fall within the
scope of the FRF Review. These responses also raised concerns about
whether the powers, resourcing, transparency, and accountability of these
bodies remain appropriate. Some respondents argued that that these bodies
should be included in regulatory co-operation initiatives, given the
importance of their roles.
Question 7- How do you think the role of Parliament in scrutinising financial services policy and regulation might be adapted? 2.13 The government set out that Parliament should play an important strategic
role in interrogating, debating, and testing the overall direction of policy for
financial services. Respondents overwhelmingly agreed that the role of
Parliament is vital for the effective scrutiny of the regulators. There was
broad support for Parliament’s existing mechanisms for holding the
regulators and HM Treasury to account. Respondents felt that the current
approach to scrutiny via select committees is appropriate and effective.
Respondents noted that the Treasury Select Committee (TSC) is well-
established, well-regarded, and that its scrutiny of the regulators through its
reviews and inquiries has been effective. However, some respondents
suggested new or altered committee structures citing concerns that the TSC
may find it challenging to scrutinise an increased volume of the regulator
proposals in depth due to the TSC’s broad remit. Suggestions from
27
respondents included the formation of a new sub-committee of the TSC, a
new Joint Committee of both Houses, or a new Parliamentary Select
Committee dedicated to Financial Services. Respondents also noted that one
of the strengths of the select committee model is its more strategic role in
scrutiny. Respondents felt that it would not be appropriate or feasible for
Parliament to seek to adopt an ECON style model of line-by-line scrutiny of
regulator proposals.
Question 8- What are your views on how the policy work of HM Treasury and the regulators should be coordinated, particularly in the early stages of policymaking? 2.14 The government set out that as part of their general responsibility for the
effective operation of the UK’s regulatory framework, it is important that HM
Treasury ministers are able to assess the implications of regulator proposals
for broader government economic and social policy priorities. A majority of
the respondents were in favour of the regulators formally consulting HM
Treasury on rule changes provided the appropriate governance arrangements
were put in place. However, respondents also noted the challenges in
achieving the right balance between maintaining the regulators’
independence and ensuring appropriate democratic input and coordination.
The importance of transparency in the relationship between HM Treasury
and the regulators was also noted by respondents who recommended
requiring the publication of the regulators’ responses to HM Treasury
recommendations.
Question 9- Do you think there are ways of further improving the regulators' policy-making processes, and in particular, ensuring that stakeholders are sufficiently involved in those processes? 2.15 The government set out that HM Treasury and the regulators are required to
engage with interested stakeholders as part of the policymaking process and
are obliged to carefully consider the views of stakeholders before finalising
legislative or regulatory proposals. Respondents noted that the regulators
already conduct extensive stakeholder engagement and research on their
proposed policies, and that the consultation requirement works well. They
also noted that the regulators engage in existing good practice that goes
beyond their statutory consultation requirement, and there was wide
appreciation of their approach to early and open engagement with industry
through discussion papers and calls for input. Suggestions for improvements
included strengthening and enhancing these practices and their statutory
underpinning, rather than an overhaul of the consultation process.
2.16 Respondents showed support for greater transparency in the operation of
the regulators’ statutory panels, with the regulators doing more to explain
how they have taken panel views into account. Earlier involvement for panels
in the consultation process was also recommended by some respondents.
Respondents suggested more specialised representation in the membership
of the panels including industry specialists or consumer groups where
28
appropriate. Some respondents argued that the panels should provide more
technical comment as part of this specialisation. Respondents noted that
changes to the appointment process for panel members is a potential route
to increased accountability and suggestions included more use of industry
nominations for panels and strengthening the relationship between panels
and HM Treasury.
2.17 The government welcomed views on whether the regulators’ cost-benefit
analysis (CBA) obligations or practices could be improved. This included how
they could better achieve a reliable assessment of the likely impact on
affected stakeholders and contribute to high-quality, evidence-based policy.
However, it was also acknowledged that changes to CBA should not over-
burden the financial services sector with information requests. Respondents
acknowledged the value of the regulators conducting CBA as part of their
policymaking process. However, there were also a significant number of
suggestions for how CBA can be made more rigorous, including when and
how CBA should be conducted, reviewed, and by whom. Several
respondents recommended the creation of an external review function for
CBA or that CBA should be submitted to existing bodies such as the
Regulatory Policy or Better Regulation Committees. There were also calls for
the requirement to conduct CBA to be extended to all interventions,
including guidance, which was cited as often having a supervisory effect.
2.18 A common theme was that CBA should take a wider range of factors into
account. This included suggestions on including non-economic/non-financial
impacts, the impact of rules on competitiveness, and increasing the focus on
the long-term impact of rules. Some respondents argued that the cumulative
impact of regulations (including otherwise low-impact regulations) on firms
and/or sectors should be part of CBA, rather than just the impact of the
individual measure. There were also calls for clearer articulation of
uncertainty in estimates. Some respondents suggested that CBA should
include fuller analysis of alternative options, and not just the difference
between the proposal and doing nothing. Some industry respondents
expressed concerns that regulators’ CBA is overly focussed on the expected
benefits of intervention and underplays the costs to individual firms and the
wider market. For example, the impact of consequential behaviour changes
by consumers was felt to be underappreciated by the regulators when
assessing the benefits of policies. Some consumer groups, on the other
hand, felt that CBA was overly concerned with the cost to firms, and
disregarded benefits to consumers from intervention or the impact of
intervention (and non-intervention) on groups such as vulnerable consumers.
2.19 Industry respondents also made a number of proposals around independent
scrutiny of the regulators. These proposals included the establishment of an
external body to conduct reviews into regulator rules, and a new external
appeals mechanism allowing firms to challenge regulator decisions. This
latter mechanism was proposed as potentially being a less expensive and
resource intensive alternative to Judicial Review for firms to challenge
regulatory decision making. Respondents noted the value of regular rule
reviews and made a number of suggestions for how to increase their
frequency, including more systematic reviews conducted by the regulators of
entire regimes or sectors, enabling HM Treasury to appoint independent
29
reviewers to conduct reviews into rules, and the introduction of timeframes
for when rule reviews should be conducted.
2.20 Further discussion of consultation responses on specific aspects of the
regulatory framework is included in subsequent chapters where relevant.
30
Chapter 3
Objectives and principles
3.1 This chapter outlines the government’s approach to updating the regulators’
objectives and principles. It sets out the priority the government gives to
maintaining the safety and soundness of the UK’s financial sector, considers
the balance between long-term economic growth, international
competitiveness and the regulators’ current objectives. It then sets out the
government’s intention to provide for a greater focus on growth and
international competitiveness through the introduction of new secondary
objectives for the Prudential Regulation Authority (PRA) and Financial
Conduct Authority (FCA).
3.2 It also sets out the proposals for updating the regulatory principles, including
by revising the existing sustainable growth principle to incorporate climate
targets.
The Statutory Objectives and Principles 3.3 As the government considers the UK’s new position outside the EU, it is
appropriate to evaluate the regulators’ objectives and principles and assess
whether they continue to set the right strategic considerations for the
regulators. In the previous consultation, the government invited views on
whether the regulators’ objectives should be changed or added to, and
whether their principles should be updated.
3.4 The government considers that the FCA’s current strategic objective to
ensure that relevant markets function well is the right strategic focus, and
that its operational objectives are an effective way of protecting the integrity
of the UK’s financial services market, safeguarding consumer protection, and
promoting effective and healthy competition in consumers’ interests. The
FCA also has an important role to play in combating financial crime. The
PRA’s present statutory objective of promoting safety and soundness among
PRA-authorised persons is vital to the ongoing stability of the financial
services sector. Its objective to contribute to securing an appropriate degree
of protection for those who are or may become insurance policy holders,
and its secondary objective to promote effective competition, are important
priorities for the government. The policy aims encapsulated by the current
regulatory objectives are vital to ensuring a stable and fair financial system in
which the UK public and international stakeholders can have confidence.
Responses to the previous consultation demonstrated that the majority of
stakeholders recognise the importance of these objectives to the UK’s
financial services sector.
31
3.5 As set out in the strategy document published alongside the Chancellor’s
Mansion House speech in July 2021, A new chapter for financial services,1
the UK will continue to remain a global leader in promoting high
international standards. Alongside this commitment, the government stated
its intention to ensure that the financial services sector is delivering for
businesses and consumers across the UK. The government considers that the
regulators’ current objectives are each important in helping to deliver these
outcomes. Robust regulatory standards encouraged by these objectives are
the cornerstone of the UK market’s attractiveness, and the stability and
soundness of the UK’s market remains an important priority for the
government.
3.6 Similarly, the government considers that the 8 existing regulatory principles
broadly capture the key considerations the regulators should take into
account when carrying out their general functions. There was little support
from respondents to the consultation to remove any of the existing
regulatory principles. The government agrees that there is no need to
remove any of them from the regulatory framework.
3.7 However, there are some additional policy areas that consultation
respondents suggested should be included in the regulators’ objectives and
principles.
Long-term economic growth and international competitiveness 3.8 The government recognises that the financial services sector is not just an
industry in its own right but an engine of growth for the wider economy.
The Mansion House document, A new chapter for financial services,2 set out
the government’s vision for a sector that is globally competitive and acts in
the interests of communities and citizens, creating jobs, supporting
businesses, and powering growth across the UK.
3.9 In recent years, including during the passage of the Financial Services Act
2021 (FS Act 2021), there has been significant debate in Parliament and
among industry stakeholders about whether the regulators should have a
specific objective to require them to advance the growth of the UK economy
and the competitiveness of the UK financial sector. This debate was also
reflected in Lord Hill’s report on the UK Listings Regime, published in March
2021, which recommended that the government consider the case for
amending the FCA’s statutory objectives to include a ‘competitiveness’ or
‘growth’ requirement.3
3.10 Many stakeholders responding to the previous consultation argued that,
given the importance of a thriving financial services sector for UK economic
growth and prosperity, the regulators should have a statutory duty to
support the economic viability of financial services and the ability of the
sector to compete internationally. By contrast, respondents opposed to the
1 A new chapter for financial services, HM Treasury, July 2021.
2 A new chapter for financial services, HM Treasury, July 2021.
3 UK Listing Review, Lord Hill, March 2021.
32
proposition argued that a new objective could distract from or dilute the
regulators’ existing objectives. As explained above, the government
continues to agree that the current objectives set broadly the right strategic
considerations, and has carefully considered the many representations it has
received on this issue, as well as the ongoing public debate.
3.11 Supporters of action on growth and competitiveness noted that comparable
jurisdictions have various mechanisms that seek to balance regulator
objectives for financial stability and consumer protection with objectives
related to growth or competitiveness. As noted by Lord Hill,4 other financial
services regulators – for example in Australia, Singapore, Hong Kong, and
Japan – have growth or competitiveness embedded in their frameworks.
Although these regulators have different structures and powers, the focus
on growth or competitiveness tends to function either as a specific objective,
or as a balance to stability objectives. In addition, Switzerland’s independent
financial markets regulator (FINMA) has its contribution to sustaining the
reputation and competitiveness of the Swiss financial marketplace set out in
statute. The government’s view is that the successes of these jurisdictions
demonstrate the feasibility of embedding competitiveness and growth
considerations within a regulatory framework without harming financial
stability.
3.12 As the government considers the UK’s new circumstances outside the EU, it
is appropriate to evaluate the effectiveness of the regulators’ existing
objectives in contributing to the UK’s long-term economic growth and
international competitiveness. For example, the EU’s approach to financial
services regulation was not constrained by any particular objectives. This
meant that it was possible to consider the competitiveness of the EU as a
financial centre during the legislative process. When the European
Commission brought forward legislative proposals, and when these were
considered by the European Council and European Parliament, each could
weigh the impact of new regulation on the growth and competitiveness of
the EU, and balance that against the other aims of the legislation.5
3.13 As the regulators take on responsibility for setting detailed rules in areas
currently covered by retained EU law, the government considers that it is
right that the regulators’ objectives reflect the need to support the long-term
growth and international competitiveness of the UK economy, including the
financial services sector. This can be done in a way that does not detract
from the regulators’ existing objectives of ensuring that UK firms remain safe
and sound, that the UK’s markets function well, and that consumers and
users of financial services receive an appropriate degree of protection.
3.14 Some consultation respondents advocated for a new objective that would
require the regulators to make direct trade-offs between growth and
competitiveness on the one hand, and the PRA’s existing primary objective
and the FCA’s existing strategic and operational objectives on the other. The
4 UK Listing Review, Lord Hill, March 2021
5 For example, Article 89 of the Fourth Capital Requirements Directive (2013/36/EU) required the Commission to conduct “a general
assessment as regards potential negative economic consequences of [the public disclosure requirements in CRD IV] including the
impact on competitiveness…” and, if the report identifies significant negative effects, to consider a legislative proposal to amend
the disclosure requirements.
33
government has considered such proposals carefully, but has concluded that
there are potential disadvantages to such an approach. For example, if it
inhibited the ability of the regulators to make effective prudential regulation,
this could potentially reduce the UK’s financial stability and the ability of the
regulators to conform to international standards, which is incompatible with
the government’s commitment to global leadership. Furthermore,
significantly compromising the standards that underpin our regime and the
UK’s international reputation could have the effect of undermining the UK’s
competitiveness by reducing confidence in the safety and stability of the UK’s
market, or the level of protection for consumers and other market users –
meaning that such an approach would not achieve the intended outcome.
3.15 Other respondents suggested that an alternative method for increasing the
regulators’ focus on competitiveness would be the introduction of a new
regulatory principle focused on competitiveness. However, the regulators are
not required to act to advance their regulatory principles; instead they must
take them into account when pursuing their statutory objectives. While a
regulatory principle would likely have some effect in increasing the
regulators’ focus on competitiveness, the government considers that it
would not provide the regulators with the appropriate statutory basis
required to act to support competitiveness in line with the government’s
vision for the sector.
Measure 1: New growth and international competitiveness objectives 3.16 The government intends to provide for a greater focus on growth and
international competitiveness through the introduction of new secondary
objectives for the PRA and the FCA.
3.17 In crafting the new objectives, the government has taken into consideration
the wide range of views expressed in the responses to the consultation.
Respecting the need for the regulators to maintain high regulatory standards
in the UK and align with international standards, the government will make
provision for the regulators to facilitate the long-term growth of the UK
economy, including through the lens of international competitiveness.
3.18 For the PRA, the government intends to introduce the new growth and
international competitiveness objective as a secondary objective to sit
alongside the PRA’s existing secondary objective to facilitate effective
competition in the markets for services provided by PRA-authorised persons.
This will mean that, as the PRA advances its general objective to promote the
safety and soundness of PRA-authorised persons and its insurance specific
objective on policyholder protection, the PRA will be required to act in a way
that, subject to aligning with international standards and so far as is
reasonably possible, facilitates the long-term growth and international
competitiveness of the UK economy, including the financial services sector.
As with the PRA’s competition objective, this would not require or authorise
the PRA to take any action inconsistent with its primary objectives.
34
3.19 For the FCA, the government similarly intends to introduce the new growth
and international competitiveness objective as a secondary objective. This will
mean that the new objective will complement the FCA’s three existing
operational objectives of consumer protection, market integrity and
competition, all of which sit underneath the FCA’s single strategic objective
to ensure that relevant markets function well. As will be the case for the
PRA, as the FCA advances its operational objectives, the FCA will be required
to act in a way that, subject to aligning with international standards and so
far as is reasonably possible, facilitates the long-term growth and
international competitiveness of the UK economy, including the financial
services sector. In line with the way the PRA’s competition objective works at
present, this would not require or authorise the FCA to take any action
inconsistent with its strategic or operational objectives. This new objective
would also not change the FCA’s competition duty which requires it to
promote effective competition in the interests of consumers so far as is
compatible with meeting its objectives to protect consumers and enhance
market integrity.
3.20 The government will also require both regulators to report on their
performance against their growth and competitiveness objective on an
annual basis.
Question 1: Do you agree with the government’s approach to add new growth and
international competitiveness secondary objectives for the PRA and the FCA?
Alternative proposals 3.21 In response to the previous consultation, the government received a number
of alternative proposals. For example, consultation respondents suggested
that a strengthened regulatory principle on proportionality would encourage
the removal of unnecessary burdens on industry. The government considers
that proportionality is already sufficiently embedded in the regulators’
statutory principles, requiring the regulators to ensure that any burden or
restriction is proportionate to the expected benefits, taking into account
costs to firms and consumers. As part of the regulators’ accountability
mechanisms, including their annual reports, regulators are required to set
out how they have considered their principles. The government is therefore
not persuaded that this principle should be amended.
3.22 Consultation respondents also highlighted that increased innovation may be
a benefit of proposed new objectives or regulatory principles focused on
proportionality, economic growth, or competitiveness. Some respondents
argued for a standalone regulatory principle to increase innovation in the
financial services system. The regulators’ current set of objectives (particularly
those in relation to competition) have allowed the FCA to establish Project
Innovate, resulting in the creation of an Innovation Hub and the Regulatory
Sandbox, both of which are now held up as examples of global best practice
in increasing innovation in financial services and other sectors. The
government is therefore not persuaded by the need for an additional
regulatory principle focused on innovation alone, and is confident that the
balance of objectives and regulatory principles allows the regulators to act to
35
encourage innovation. The government also asked the regulators to consider
the desire ‘to see innovation in the financial services sector’ in the most
recent recommendations letters published in March 2021.
3.23 A number of respondents argued for one or both of a financial inclusion
objective or principle for regulators, and a duty of care for regulated firms.
The government’s view is that the FCA’s current and ongoing initiatives in
the financial inclusion space, including those relating to access to cash and
vulnerable consumers, demonstrates that it can already effectively support
the government’s leadership on this agenda through the present operational
objectives and regulatory principles. The government has already legislated
to require the FCA to consult on the introduction of a duty of care owed by
firms to consumers through the FS Act 2021. This was in response to calls
from Parliamentarians to introduce such a duty in order to reduce levels of
harm in the financial services sector. The FCA has since consulted on the
introduction of a new ‘Consumer Duty’, which seeks to set higher and
clearer expectations for the standard of care firms should provide to
consumers. The FCA intends to publish a further consultation by 31
December 2021 and is required to make any new rules it considers
appropriate by August 2022.
Climate change 3.24 The government is committed to tackling climate change and has made a
series of commitments to advance environmental and climate goals. In 2019,
the UK became the first major economy to write into law its commitment to
reach net zero greenhouse gas emissions by 2050. In 2021 the government
went further, setting out the world’s most ambitious climate change target
to cut emissions by 78% by 2035. The financial services sector needs to
support these challenging targets if they are to be met. Action has already
been announced through the policy frameworks outlined in the Prime
Minister’s Ten Point Plan for a Green Industrial Revolution6 and the
Chancellor’s Mansion House speech.7
3.25 The UK’s approach to embedding climate considerations within the actions
of its financial services regulators is already world leading. The
recommendations letters, which allow the government to make
recommendations to the regulators on matters of economic policy, were
updated in 2021 with new economic policy objectives including the
‘transition to an environmentally sustainable and resilient net zero economy’
and set out specific aspects of this policy that they should take into account;
this included climate change for the first time. Alongside this change, the FS
Act 2021 requires the PRA and the FCA, from 1 January 2022, to ‘have
regard’ to the 2050 Net Zero target when making rules to implement the
latest Basel standards, and making rules as part of the Investment Firms
Prudential Regime. Throughout the passage of this Act, the government was
clear that the FRF Review presents an opportunity to consider action beyond
6 The ten point plan for a green industrial revolution, HM Government, November 2020.
7 Mansion House Speech 2021 – Rishi Sunak, HM Treasury, July 2021.
36
these changes. As set out in Chapter 2, several respondents to the
consultation noted the specific need for a new regulatory objective or
principle relating to green or climate change issues.
Measure 2: Incorporation of climate change into the regulatory principles 3.26 The government considers there to be an opportunity to further strengthen
the UK’s regulatory regime relating to climate. Embedding climate change
into the regulatory principles would demonstrate the government’s long-
term commitment to transform the economy. The PRA and the FCA are
already subject to a regulatory principle which requires them to take into
account the desirability of sustainable growth in the economy in the UK in
the medium or long term. Alongside the new secondary objective to
facilitate growth and international competitiveness, the government
therefore proposes to amend the existing regulatory principles to be clear
that such growth should occur in a sustainable way that is consistent with
the government’s commitment to achieve a net zero economy by 2050 to
meet the obligation set out in section 1 of the Climate Change Act 2008.
Question 2: Do you agree that the regulatory principle for sustainable growth
should be updated to reference climate change and a net zero economy?
37
Chapter 4
Relationship with HM Treasury
4.1 This chapter provides an overview of the government’s proposed approach
to strengthening the existing mechanisms underpinning the regulators’
relationship with HM Treasury. It sets out an overview of the responses
provided to the previous consultation and outlines the considerations the
government considers key in proposing changes to accountability. The
chapter then sets out the government’s proposals in this area.
4.2 As the authorities responsible for UK financial services regulation, the
relationship between HM Treasury and the regulators involves wide-ranging
collaboration and coordination. Effective coordination between regulatory
bodies is vital for the smooth and successful operation of our regulatory
regime. The first stage of the Future Regulatory Framework (FRF) Review in
2019 examined coordination between the UK authorities that have
responsibility for the regulation of the financial services sector. This resulted
in the creation of the Financial Services Regulatory Initiatives Grid and
Forum. This provides a clear picture of expected regulatory activity to help
regulators, firms and consumer stakeholders plan ahead and improve
proportionality, co-ordination and transparency across the regulatory
landscape for financial services, reducing the operational burden on industry.
4.3 The government considers that the greater responsibility being given to the
regulators, following the UK’s departure from the EU and the
implementation of the FRF Review, should be balanced with effective policy
input and appropriate accountability to government. This view is supported
by responses to the previous consultation.
4.4 In the previous consultation, the government suggested some initial
proposals and principles for providing this balance. Responses to these
suggestions were largely positive, though respondents noted the importance
of ensuring that new accountability mechanisms do not undermine the
regulators’ independence, a point reiterated by the Treasury Select
Committee (TSC) in their 6 July 2021 report into The Future Framework for
Regulation of Financial Services.1 Many respondents also touched on the
importance of greater transparency under the new arrangements.
4.5 The existing mechanisms governing the regulators’ relationship with HM
Treasury, both formal and informal, have been outlined earlier (see Chapter
1), and the government considers that they are largely effective. However,
the government considers that it would be appropriate to bring forward a
number of targeted proposals which build on these existing mechanisms.
1 The Future Framework for Regulation of Financial Services, Treasury Select Committee, July 2021.
38
Importantly, while the regulators’ expanded responsibilities require
strengthened engagement and relationship mechanisms, the government
agrees that it is vital not to compromise the regulators’ independence, and
these measures should not constitute a veto or power of direction for HM
Treasury over policy which is properly a matter for our independent
regulators.
4.6 The government considers that the specific area of regulators’ responsibilities
where the relationship with HM Treasury requires strengthening is
rulemaking. While it is important to maintain the regulators’ independence
and respect their expertise, the government has a justifiable interest in the
policymaking that informs the regulators’ rules. The regulators’ other
functions, including enforcement and supervision, are not areas in which
increased accountability to HM Treasury would be useful or desirable.
4.7 With the above considerations in mind, and taking into account the views of
consultation respondents, the government proposes the following measures
to strengthen the regulators’ relationship with HM Treasury.
HM Treasury recommendations 4.8 As noted earlier, the Financial Services and Markets Act (FSMA) 2000 and
the Bank of England Act 1998 provide that HM Treasury may at any time
make recommendations to the Prudential Regulation Committee (PRC), the
governing committee of the Prudential Regulation Authority (PRA), and the
Financial Conduct Authority (FCA) on issues related to matters of economic
policy through recommendations letters (also known as remit letters).2 These
recommendations to the PRA and the FCA must be made at least once a
Parliament, and must be published by HM Treasury and a copy laid before
Parliament. The recommendations letters serve the valuable purpose of
providing an opportunity for government to make recommendations related
to particularly topical issues or aspects of the government’s economic policy.
4.9 HM Treasury may at any time make similar recommendations to the Bank of
England’s Financial Policy Committee (FPC),3 though the scope of these
recommendations is wider, going beyond matters the FPC should ‘have
regard’ to while exercising its functions.4 The FPC must respond to the
recommendations, explaining how they have taken action, intend to take
action, or reasoning for not intending to act in accordance with HM
Treasury’s recommendations.5
2 FSMA, section 1JA (FCA) and Bank of England Act 1998, section 30B.
3 Bank of England Act 1998, section 9E.
4 For example, HM Treasury may make recommendations to the FPC recommendations about “the responsibility of the [Financial
Policy] Committee in relation to support for the economic policy of Her Majesty's Government, including its objectives for growth
and employment.” For the PRC and FCA, HM Treasury may only make recommendations about what the regulator should ‘have
regard’ to.
5 Bank of England Act 1998, section 9E, subsection 3.
39
Measure 3: Requirement for regulators to respond to HM Treasury recommendations letters 4.10 In the previous consultation, the government suggested that increasing the
frequency of recommendations letters was an option for strengthening the
regulators’ accountability to HM Treasury.
4.11 As noted above, the current requirement sets out that HM Treasury must
make recommendations ‘at least’ once per Parliament. This means that the
government already has the option to make additional recommendations,
where necessary, to reflect changing government priorities.
4.12 Consultation respondents raised some concerns over the proposal to
mandate an increased frequency for recommendations letters. This was on
the basis that increasing the frequency to more than once per Parliament
(for example, annually or even biannually) runs the risk of creating
uncertainty for the regulators – and industry and consumers – through
regularly changing the public policy matters that need to be considered by
the PRC and the FCA.
4.13 The government therefore considers that the current requirement to make
recommendations to the PRC and FCA at least once in each Parliament
remains appropriate, given that the government has the option to make
them more regularly if doing so is necessary to reflect changing government
priorities.
4.14 However, the government has considered the fact that there is currently no
requirement for the PRC and the FCA to respond to the government’s
recommendations. Some consultation respondents suggested that the
regulators could be required to publish a response. Imposing this
requirement to respond would increase HM Treasury and wider stakeholders’
ability to see how the regulators have taken into account the
recommendations.
4.15 The government therefore intends to introduce a new statutory requirement
for the PRC and the FCA to respond to HM Treasury recommendations,
bringing them into line with the FPC. As the regulators take on more policy
responsibility following the UK’s exit from the EU, this will increase
transparency around how the regulators take into account these
recommendations, and increase their effectiveness as a mechanism for
setting out which aspects of the government’s economic policy the
regulators should take into account when exercising their functions.
4.16 The government intends that the obligations on the PRC and the FCA should
broadly align with those which apply to the FPC, while recognising the
different nature of FPC letters (as noted earlier in this section). Within the
response, the regulators should provide an overview of:
• how they have taken account of each recommendation in the letter
• any impact on policy that has resulted from recommendations
4.17 In line with the requirement for HM Treasury to publish FPC responses and
lay them before Parliament, the government intends that HM Treasury
40
should be required to publish the PRC and the FCA responses and lay them
before Parliament.
4.18 The government intends to require that the PRA and the FCA provide a
response on an annual basis, covering their activity in the previous year.
Measure 4: Power for HM Treasury to require the regulator to conduct a rule review 4.19 At present, how and when the regulators review their rules to assess
whether they function as intended is largely at the discretion of the
regulators. There is no formal mechanism for HM Treasury, or anyone else,
to require the regulators to conduct reviews of their existing rules. As the
regulators take on increased policymaking responsibilities following the
implementation of the FRF Review, there may be areas where the
government considers it is in the public interest for the regulators to review
their rules to assess whether they are appropriate.
4.20 Respondents to the previous consultation raised concerns regarding the
current avenues for ongoing challenge of regulator rules. In particular, some
respondents noted that judicial review is not frequently used by firms and
that there were few other avenues to challenge regulator rules. Some
respondents suggested that a new external review body should be set up to
review regulators’ rules, while others argued for the creation of a new
external appeals mechanism allowing firms to challenge regulatory decision
making. There was a further suggestion that a designated group of industry
bodies could be given a power to trigger rule reviews.
4.21 The government has considered the consultation responses carefully and
sought to strike the appropriate balance between the regulators’
independence and ensuring that there is appropriate ongoing scrutiny of
regulators’ rules.
4.22 The government therefore intends to introduce a new power for HM
Treasury to be able to require the regulators to review their rules where the
government considers that it is in the public interest. This would allow,
where appropriate, for an independent person to be appointed to conduct
the review.
4.23 The government expects the proposed power would only be used in
exceptional circumstances. For example, where there has been a significant
change in market conditions, or other evidence suggests that the relevant
rules are no longer acting as intended.
4.24 The government expects that, alongside such a power, provisions would be
made setting out how it would be operationalised. These may include:
• HM Treasury powers of direction on scope, conduct, timing, and
making of reports
• a requirement for the regulator to report the outcome of the review to
HM Treasury
41
• a requirement for HM Treasury to lay directions and reports before
Parliament and publish them, unless this would be considered not in
the public interest
• a requirement for the regulators to each maintain a statement of policy
on how they will conduct reviews under the power
4.25 The government considers that this proposal offers a new avenue for
challenge of the regulators’ rulemaking, while still maintaining the
operational independence of the regulators as set out in FSMA and relevant
provisions in other financial services legislation.
Question 3: Do you agree that the proposed power for HM Treasury to require the
regulators to review their rules offers an appropriate mechanism to review rules
when necessary?
Overseas deference arrangements and trade agreements
Deference arrangements 4.26 While a member of the EU, the UK was subject to the equivalence decisions
made at an EU level, rather than independently setting its own policy.
Therefore, the current FSMA framework does not require the regulators to
consider the impact of their activities on HM Treasury’s deference
arrangements, including equivalence, as these impacts did not arise during
membership of the EU.6
4.27 The government currently has extensive deference arrangements with
overseas jurisdictions (which include incorporating nearly all of the existing
EU equivalence determinations for overseas jurisdictions at the end of the
transition period into UK law), as well as deference afforded to the UK by
overseas jurisdictions. In utilising its new deference tools, the government
also intends to enter into Mutual Recognition Agreements with our overseas
partners
4.28 In his speech at Mansion House, the Chancellor outlined his vision for using
the UK’s strengths as a global financial hub to establish and enhance strong
relationships with jurisdictions all around the world, attracting investment
and increasing opportunities for cross-border trade and supporting openness
through consistently high standards. The vision also emphasised using HM
Treasury’s deference mechanisms, including equivalence decisions and
Mutual Recognition Agreements, to deliver the government’s ambition.
4.29 The government recognises that different combinations of rules and
supervisory practices can achieve equivalent outcomes to the corresponding
UK framework. Therefore, assessments of other jurisdictions for the purposes
of deference focus on whether they achieve an equivalent outcome to the
relevant UK regime. The UK’s approach to deference is therefore flexible
6 Regulatory deference, including the issuing of equivalence decisions, is a process endorsed by the G20 where jurisdictions and
regulators defer to each other when it is justified by the quality of their respective regulatory, supervisory and enforcement
regimes.
42
enough to allow for both jurisdictions to change and adapt their rules, with
the UK still being able to maintain deference arrangements with the overseas
jurisdiction. The financial services sector is not static, and regulatory regimes
will necessarily evolve over time. As rules evolve this could create material
deviations with regard to the corresponding rules used by international
partners with whom the UK has deference arrangements.
Trade agreements 4.30 In addition to using HM Treasury’s deference mechanisms to establish and
enhance strong relationships specifically on financial services, the
government is also pursuing an ambitious free trade agenda, setting a new
global standard for financial services in trade agreements. These agreements,
covering free trade agreements, bilateral investment treaties and the WTO
agreements, will create obligations on UK authorities that will need to be
considered when setting rules that apply to firms.
4.31 The FRF Review will significantly increase the regulators’ responsibilities,
including in areas where the UK may have taken obligations under trade
agreements with overseas jurisdictions. Actions taken by regulators in these
areas, including by amending their rules, could be challenged under the
dispute settlement mechanisms of a free trade agreement if they breach
these obligations. To help mitigate this risk, it is appropriate to ensure that
the regulators’ accountability framework appropriately covers the trade
obligations that the UK is subject to.
Measure 5: New overseas deference arrangements and trade agreements accountability mechanisms 4.32 Under the FSMA model, and following the implementation of the FRF
Review, the regulators will generally have responsibility for setting the rules
that apply to firms. The government considers that there is now a case for
ensuring that the regulators consider the potential impacts on deference
arrangements and assess compliance with relevant trade agreements as a
matter of course when making rules and when setting general approaches
on supervision, where relevant and proportionate. The government therefore
proposes introducing new accountability mechanisms requiring the
regulators to consider the impact of exercising their powers to make rules
and set general approaches on supervision, and to assess compliance with
relevant trade agreements with overseas jurisdictions.
4.33 This would consider the possible impact on relevant deference arrangements
afforded to the UK by overseas jurisdictions, where proportionate and
relevant, as well as where the UK has provided deference to overseas
jurisdictions (including equivalence decisions and Mutual Recognition
Agreements). When making rules and when setting general approaches on
supervision where appropriate and proportionate, the government proposes
that the regulators would be required to consult HM Treasury on the general
anticipated impact on these areas, providing the opportunity for further
43
dialogue to assist the government with the management of the UK’s
deference arrangements. For trade agreements, this would require the
regulators to assess, where proportionate and relevant, whether the exercise
of their powers to set rules and general approaches on supervision is in
compliance with the UK’s obligations under our trade agreements.
Question 4: Do you agree with the proposed approach to resolve the interaction
between the regulators’ responsibilities under FSMA and the government’s overseas
arrangements and agreements?
Alternative proposals 4.34 As noted previously, in the years since FSMA was introduced, and in
particular following the global financial crisis and the growth of the Single
Market in the EU, EU financial services regulation has expanded into new
areas and become significantly more detailed. EU legislation was proposed
by the European Commission and negotiated with Member State
governments and the European Parliament. HM Treasury, which led the UK’s
negotiations on EU financial services legislation, therefore took on
responsibility for key areas of regulatory policy. While the UK regulators
supported HM Treasury on the technical detail, the government was directly
responsible for negotiating areas of detailed regulatory requirements that
would otherwise have sat with UK regulators under the FSMA model. This
allowed ministers to reflect wider public policy considerations in our
approach to negotiations; for example, ensuring proposals on the regulation
of mortgages didn’t adversely affect the ability for borrowers to attain home
ownership in the UK.
4.35 As the regulators take on additional responsibility for determining the direct
regulatory requirements that apply to firms in these areas, the scrutiny and
input provided by the EU level of policymaking – including that provided by
HM Treasury as part of it – will no longer be in place. The government is of
the view that it is appropriate for the detailed rules to be determined by the
independent, expert regulators, and so is not proposing to replicate the EU
process.
4.36 In the previous consultation, the government suggested some form of
general arrangement whereby the regulators would consult HM Treasury
more systematically on proposed rule changes at an early stage in the
policymaking process and before proposals were published for public
consultation.
4.37 Given the detailed measures proposed in this consultation, the government
is continuing to consider whether any further arrangements for how the
regulators may be required to consult HM Treasury are necessary.
44
Chapter 5
Accountability to Parliament
5.1 This chapter sets out the role of Parliament in the scrutiny of the regulators
under the UK’s regulatory framework and the government’s proposals to
strengthen the existing mechanisms which Parliament uses to hold the
regulators to account and scrutinise their work.
5.2 It sets out proposals for clearer requirements on when and how information
should be provided to Parliament. These measures have been designed to
support more effective accountability to, and scrutiny, of the regulators by
Parliament.
Current arrangements and proposed approach 5.3 As set out in Chapter 1, Parliament sets the regulatory framework in the UK
through the legislation under which the financial services regulators operate.
This framework includes the regulators’ objectives and the powers that they
are given to pursue those objectives. As Parliament determines the roles and
powers of the regulators, it has an interest in knowing how this framework
operates and how the powers are being used. Parliament therefore rightly
has a unique and special role in relation to the scrutiny and oversight of the
financial services regulators. Effective Parliamentary scrutiny provides a
valuable service for consumers, firms and the regulators. It can help to
ensure that the regulators’ resources are appropriately targeted to consider
appropriate democratic policy input from Parliament and bring important
public policy considerations into focus.
5.4 The Future Regulatory Framework (FRF) Review will see the regulators take
on increased responsibility for direct regulatory requirements which apply to
firms. The government considers that Parliament’s focus should continue to
be on setting the strategic framework and objectives for financial services
regulation, and holding the regulators to account for their actions to further
their statutory objectives.
5.5 This approach aligns with the Treasury Select Committee (TSC)’s report on
The Future Framework for Regulation of Financial Services,1 in which the
committee suggests that a targeted approach to scrutiny through the select
committee system focused on the current framework, with some ex-ante
scrutiny, is preferable to ‘line-by-line’ scrutiny of all regulator proposals.
Respondents to the previous consultation also felt that it would not be
1 The Future Framework for Regulation of Financial Services, House of Commons Treasury Committee, July 2021.
45
appropriate or feasible for Parliament to seek to adopt a model of line-by-
line scrutiny of regulator proposals, similar to that of the Economic and
Monetary Affairs (ECON) Committee of the European Parliament.
5.6 The All-Party Parliamentary Group on Financial Markets and Services’ report
on The Role of Parliament in the Future Regulatory Framework for Financial
Services also suggested that Parliament’s key focus should be on setting the
framework for regulating financial services and scrutinising the delivery of
regulation within that framework.2
5.7 The government’s view is that the existing Parliamentary scrutiny
mechanisms – including the targeted scrutiny provided by select committees
– are appropriate and flexible and should continue to be the principal ways
in which Parliament holds the regulators to account.
5.8 Respondents to the previous consultation strongly agreed with the
importance and value of Parliamentary accountability and scrutiny of the
regulators. The select committee system was considered robust and effective,
and respondents felt the TSC performed an important and valuable function
in holding the regulators to account. Given the regulators’ wide-ranging
powers, which they exercise independently of government, it is vital that
Parliament is able to continue to effectively scrutinise and hold the regulators
to account following the implementation of the FRF Review.
5.9 The debates during the passage of the FS Act 2021 demonstrated
Parliament’s keen interest in ensuring that appropriate mechanisms are in
place to allow it to effectively scrutinise financial services policymaking and
the activities of the regulators. In particular, participants in the debate
highlighted the importance of the regulators having sufficient regard to the
conclusions of Parliamentary scrutiny, and the importance of
parliamentarians receiving sufficient information from the regulators to
facilitate their scrutiny and ensure it is effective.
5.10 Throughout the passage of the Act, several parliamentarians commented
that the current legislation does not set specific requirements on regulators
to provide Parliament with the information it requires to scrutinise financial
services policy effectively. They called for an explicit requirement for the
regulators to provide Parliament with relevant information, tabling
amendments to this effect. The government recognised these concerns, and
welcomed the commitments from the Financial Conduct Authority (FCA) and
Prudential Regulation Authority (PRA) in March 2021 to an open and
transparent relationship with Parliament, and the reassurance that the PRA
and the FCA would have due regard to the conclusions of any Parliamentary
scrutiny.3 The government has therefore considered this issue carefully,
including the proposals noted above from respondents and Parliamentarians
designed to address the concerns raised, and reflecting the commitments
made by the regulators during the passage of the FS Act 2021.
2 The Role of Parliament in the Future Regulatory Framework for Financial Services, All-Party Parliamentary Group on Financial
Markets & Services, February 2021.
3 FCA accountability to Parliament and approach to sustainable finance, Financial Conduct Authority, March 2021.
Financial Services (FS) Bill 2019-2021, Prudential Regulation Authority, March 2021.
46
5.11 The government is also aware of the lively debate in Parliament regarding
the appropriate committee structure for scrutinising financial services, and
the views shared in response to our first consultation. However, Parliament is
responsible for determining the best structure for its ongoing scrutiny of the
regulators. The government will therefore not be making recommendations
to Parliament on this matter.
5.12 Some respondents to the previous consultation also noted the importance of
Parliament and select committees having access to appropriate financial
services technical expertise. The government’s view, in line with that set out
by the TSC in their recent report,4 is that Parliament already has the ability to
draw on expertise. Further, as noted by respondents to the previous
consultation, Parliament can also use industry and regulator secondments to
further enhance technical expertise where required. Therefore, the
government will not be making recommendations to Parliament on this
matter.
5.13 The government’s proposals aim to ensure that select committees continue
to have access to the information needed to best scrutinise the work of the
regulators and set expectations for how the regulators must respond to any
representations from Parliamentary committees. These requirements should
be sufficiently flexible to ensure that regulation can be made in a dynamic
and agile way, including by ensuring that regulators can move quickly in an
emergency.
Measure 6: Requirement to notify the relevant committee of a consultation 5.14 In order to ensure that the relevant Parliamentary committee has the
information it requires to be able to carry out effective scrutiny, the
government intends to bring forward a new statutory requirement for the
PRA and the FCA to notify the relevant Parliamentary committee when they
publish a consultation on any matter. This should draw attention to the
section of the consultation dealing with how the proposals advance the
regulators’ objectives and how they have considered their regulatory
principles and any other relevant considerations. Although the regulators
regularly bring consultation papers to the attention of the TSC, as noted by
parliamentarians through the passage of the FS Act 2021, there is currently
no statutory basis for this action. The government considers that there is
value in ensuring that parliamentarians continue to receive the right
information to conduct their scrutiny following the implementation of the
FRF Review, and believes that this measure responds to the clear calls for
action in this area throughout the passage of the FS Act 2021.
4 The Future Framework for Regulation of Financial Services, House of Commons Treasury Committee, July 2021.
47
Measure 7: Requirement for the regulators to respond to Parliament 5.15 At present, although both the PRA and the FCA engage with Parliament
regularly and respond to letters and parliamentary questions from
parliamentarians, there is no statutory requirement to respond to formal
responses to consultations from select committees. Given the important role
of select committees in the structure of Parliamentary scrutiny, and to ensure
that the regulators have due regard to the conclusions of this scrutiny, the
government intends to bring forward a new statutory requirement for the
regulators to respond in writing to formal responses to statutory
consultations from Parliamentary committees. This proposal will allow
Parliament to understand how the regulators have considered the
committee’s views and any changes that have been made to the approach,
drawing on (or cross-referring to) the policy statement issued by regulators
where relevant.
Question 5: Do you agree that these measures require the regulators to provide the
necessary information on a statutory basis for Parliament to conduct its scrutiny?
48
Chapter 6
Stakeholder engagement and the policymaking process
6.1 This chapter sets out the government’s views on the importance of
stakeholder engagement in the regulatory policymaking process. It
summarises respondents’ support for the current arrangements, and goes on
to outline the government’s proposals on stakeholder engagement, which
focus on three distinct areas: the regulators’ statutory panels, the production
of cost-benefit analysis (CBA), and how the regulators review their rules.
Stakeholder engagement 6.2 As set out in the previous consultation, the opportunity for relevant
stakeholders to engage with and scrutinise the development of policy
proposals is essential for two main reasons. First, policymaking is at its most
effective when it draws on the views, experience, and expertise of those who
may be impacted by regulation. Good policymaking should, as far as
possible, be based on evidence, and so should take into account evidence
that external stakeholders may be able to provide. Second, meaningful
engagement by stakeholders helps support the policymaking process,
making it more likely that final proposals are effective, understood, and
accepted as fair and reasonable by stakeholders.
6.3 The current requirements on the regulators to consult stakeholders are set
out in Chapter 1. Respondents to the consultation noted that the regulators
already conduct extensive stakeholder engagement and research on their
proposed policies, and that the consultation requirement works well. They
also noted that the regulators’ current engagement in many cases goes
beyond their statutory requirement to consult. Suggestions for
improvements tended to be related to strengthening and enhancing these
practices and the statutory underpinning, rather than an overhaul of the
consultation process.
6.4 The government recognises that some consultation respondents raised
concerns about specific aspects of the regulators’ stakeholder engagement.
This included concerns about aspects of the operation of the regulators’
statutory panels, a lack of clarity on the regulators’ approach to reviewing
their rules, and the rigour, scope, and external challenge of the regulators’
CBA. The following proposals are intended to reflect existing best practice by
the regulators while addressing these concerns.
49
Strengthening the role of the statutory panels 6.5 As set out in Chapter 1, following the implementation of the Future
Regulatory Framework (FRF) Review, the regulators will take responsibility for
determining the direct regulatory requirements that apply to firms that were
previously set by the EU. This is likely to result in the regulators making more
rules across a broader range of topics. This will in turn increase the
opportunities for the regulators to consult their statutory panels from the
outset of policy and regulatory development, which was not possible to the
same extent while the UK was a member of the EU.
6.6 The government and the regulators believe this will strengthen the panels’
important ability to provide stakeholder input into the development of policy
and regulation. As set out in Chapter 1, the government considers that it is
appropriate to build on the strengths of the existing arrangements. The
government intends to introduce a number of measures to ensure that there
is consistency in the panels’ status, that the panels represent a diverse range
of stakeholders, and that the regulators are transparent about where they
have engaged the panels, maintaining the crucial ‘critical friend’ role.
6.7 The government believes that the strengthened role of the statutory panels,
alongside these new measures, will address the concerns of some
respondents to the previous consultation about the panels’ functions. These
included a lack of clarity around how and when the regulators consulted the
panels on particular proposals; whether the panels were consulted early
enough to affect policy development; and whether the regulators took
panels’ views adequately into consideration.
Measure 8: Placing the FCA’s Listing Authority Advisory Panel (LAAP) and the PRA Practitioner Panel’s insurance sub-committee on a statutory footing 6.8 As set out in Chapter 1, the regulators currently maintain two panels
voluntarily: the Financial Conduct Authority (FCA)’s Listing Authority Advisory
Panel (LAAP) and the Prudential Regulation Authority (PRA)’s insurance sub-
committee. These have been in operation since the establishment of the FCA
in 2013 and the first sub-committee meeting in 2018, respectively. They
have proven value; for example, the insurance sub-committee discussed
insurance supervision in the context of the PRA consultation on operational
resilience in the last year,1 and the LAAP replied in its own right to the Lord
Hill Review.2
6.9 Given the important contribution that the panels make as a channel for
stakeholder engagement with the regulators’ policy development, the
government considers that there should be consistency across the panels’
statutory underpinning, and consistency concerning what is expected of the
regulators in terms of engaging and operating the panels. The government
1 PS6/21 CP29/19 DP1/18 Operational Resilience: Impact tolerances for important business services, PRA, March 2021.
2 FCA Listing Authority Advisory Panel (LAAP) response to the Call for Evidence by Lord Hill’s Listings Review, FCA LAAP, January
2021
50
therefore proposes that the LAAP and PRA Practitioner Panel’s insurance sub-
committee be placed on a statutory footing. The government proposes that
this would be broadly the same as the existing statutory panels under the
Financial Services and Markets Act (FSMA) 2000, and will provide confidence
to stakeholders that they are permanent and that the regulators have a duty
to consult them where appropriate.
Measure 9: Statutory requirement for the regulators to publish information on their engagement with the panels 6.10 The regulators already provide some information on panel engagement as
part of their Annual Reports, and in the FCA’s responses to the panels’
Annual Reports. Depending on the issue, the regulators also note
engagement in consultation papers. Where panels have responded directly
to a consultation, the FCA list them among the respondents. In order to
increase the transparency of where and when panels have been consulted,
the government proposes introducing a new statutory requirement to
systematise this existing practice and ensure clear and consistent
communication by regulators on their engagement with panels across all of
their work. The statutory requirement would require the regulators:
• to provide information in their annual reports on their engagement
with panels over the reporting period
• to provide, as part of public consultation, information on pre-
consultation engagement with panels
6.11 The government does not propose to specify the form and detail of the
information provided. This is to ensure that the regulators (working with the
panels as appropriate) can find the appropriate balance between
transparency and the confidentiality crucial to ensure an open exchange of
views as part of the policymaking process, which is fundamental to the
panels’ role as a ‘critical friend’.
Measure 10: Statutory requirement for the regulators to maintain a statement on appointment processes for the panels 6.12 Ensuring the right membership of the panels is crucial to their success in
providing challenge, a range of expertise, and differing perspectives. Panels
that have diverse backgrounds, expertise, and thought will be better placed
to ensure the regulators receive the most comprehensive appraisal of their
policy. In order to ensure that the membership of panels represents the full
diversity of stakeholders, both amongst practitioners and amongst
consumers, there should be a clear and transparent process for appointing
members.
6.13 The FCA has recognised the importance of improving diversity in the
membership of the panels and is already undertaking a review to identify
ways to boost diversity so their composition appropriately reflects the range
of practitioners and stakeholders in financial services. The government
51
welcomes the work the regulators are doing to move recruitment to the
panels in this direction, and expects the regulators will take this opportunity
to commit to open and fair recruitment practices to ensure a diverse range
of qualified candidates are appointed to panels.
6.14 Building on this work, and to improve transparency, the government
proposes to introduce a requirement for the regulators to each maintain
statements on their processes for appointing members to panels. This
statement would need to be approved by HM Treasury before it is published.
6.15 The government also recognises that consultation respondents raised
concerns regarding the composition of panel membership. These included
suggestions that there may be a bias towards large firms and established
sectors, and suggestions that there may be a lack of representation for some
groups; for example, vulnerable consumers.
6.16 As part of their ongoing work to improve the diversity of panels, the
regulators should also continue to consider the diversity of the sectoral
composition of membership. In the context of emerging technologies,
changing business models, and evolving consumer choices (for example, the
transition towards digital payments), it is particularly important that a
representative balance of stakeholder types and views are included. While
this is a matter for the regulators, given that the number of panel members
is not set out in legislation, one way of achieving this may be an expansion
of the number of panel members.
Question 6: Do you agree with the proposals to strengthen the role of the panels in
providing important and diverse stakeholder input into the development of policy
and regulation?
The regulators’ cost-benefit analysis (CBA) processes 6.17 Respondents to the consultation noted that conducting CBA is a useful
practice, and welcomed the regular inclusion of CBA in the regulators’
consultations. However, some respondents also expressed concerns that it is
not clear when and how regulators decide to conduct CBA (e.g. which rules
and guidance they apply to), and what the process involves. Some industry
respondents expressed concerns that the regulators’ analysis focuses overly
on the expected benefits of intervention and underplays the costs to
individual firms and the wider market. Some consumer groups, on the other
hand, felt that CBA was overly concerned with the cost to firms, and
disregarded quantifying benefits.
6.18 There were also concerns expressed regarding the rigour and scope of the
regulators’ CBAs. Some consultation respondents suggested that CBA should
include an assessment of behavioural changes that would result from the
introduction of the proposed rule, the wider effect on markets rather than
just individual firms, and for assessment of alternate options for intervention,
rather than only a comparison between the proposed rule and ‘do nothing’.
6.19 The government recognises the significant concerns around CBA that
respondents have expressed, and the following proposals are intended to
52
address them through increased transparency and improved consistency of
the CBA process. The government also recognises that the proposed
measures may increase the costs of regulation and require additional data
collection from stakeholders and firms.
Measure 11: Statutory requirement for the regulators to publish a framework for CBA 6.20 In order to increase transparency regarding when stakeholders can expect a
CBA to be conducted, and what that CBA will consist of, the government
proposes a new statutory requirement for the regulators to publish and
maintain a public version of their framework for conducting CBA.
6.21 The FCA already publishes its framework for conducting CBA which contains
the FCA’s approach to many of the suggestions made by consultation
respondents, such as consideration of effects on the wider market and CBA
of other options.3 This proposal is intended to increase transparency by
setting out that both regulators should publish and maintain these
frameworks. This will allow stakeholders to be confident that regulators’ CBA
practices are based on a consistent, publicly available approach.
6.22 Though legislation will not specify the content of the framework in detail, to
allow regulators flexibility in their operations, the government expects that it
would specify that frameworks include clear explanations of the following:
• the criteria establishing when CBA is necessary (including an
explanation of existing exemptions)
• the methodology involved in different aspects of CBA
• how representations at consultation are considered
6.23 The government proposes that under this new statutory requirement the
PRA and the FCA should be required to explain any criteria they have for
determining when to conduct CBA beyond their existing statutory
obligations under FSMA (such as for guidance). This requirement is intended
to ensure there is a clear explanation for all of the CBA conducted by the
regulators.
6.24 The publication, and maintenance of, new frameworks in relation to the
regulators’ approach to CBA will provide transparency going forward and
support robust regulatory policymaking. Clear and publicly available CBA
processes should provide further assurance to stakeholders that the
regulators are seeking to understand the effect of their regulatory
policymaking. This should also support stakeholders in considering effectively
whether the regulators’ assessments through their CBA are correct.
Question 7: Do you agree that the proposed requirement for regulators to publish
and maintain frameworks for CBA provides improved transparency to stakeholders?
3 How we analyse the costs and benefits of our policies, Financial Conduct Authority, July 2018.
53
Measure 12: Establish a statutory panel to support development of regulators’ approach to CBA 6.25 Several respondents expressed support for enhanced external challenge as a
way to improve the quality of the regulators’ CBA. The regulators’ existing
panels can be, and are, asked for early, qualitative comment on CBA.
However, given the technical nature of CBA and the existing panels’ role of
strategic input, the government proposes the creation of a new statutory
panel dedicated to supporting the development of the regulators’ CBAs.
6.26 There are a number of different options for how this panel could operate.
The government is therefore considering whether it would be most effective
for the panel to provide its input “pre-publication” as part of the
development of CBA for individual consultations, or for the panel to provide
its input “post-publication” and scrutinise the approach post-
implementation, at a more aggregate level, to consider more systematically
the regulators’ approach and methodology in approaching CBAs.
6.27 In the “pre-publication” role, the new panel would perform a similar role for
the regulator as the Regulatory Policy Committee (RPC) performs for the
government.4 The panel would therefore assess and challenge the quality of
evidence and analysis used to produce CBA for rule proposals, and provide
advice on whether CBA has been conducted according to best practice and
is likely to accurately capture the effect of the proposed change. The
government’s view is that regular, in-depth comment on CBAs pre-
consultation could improve both individual CBA and the overall approach.
6.28 The government recognises that the proposed CBA panel providing detailed
comments on all of the regulators’ CBA could cause delays to the
policymaking process. To avoid harmful delays or an overly burdensome
process for minor rule changes, there would have to be carefully considered
thresholds for when the CBA panel is asked to comment, and exemptions for
emergency rulemaking. It may also be appropriate to consider whether
expedited mechanisms need to be established for specific circumstances. A
further consideration is that this approach may require more data from firms
in advance of consultations, placing a greater cost on firms and regulators.
6.29 The alternative approach is for the new CBA panel to have a “post-
publication” role and so would therefore review CBA following
implementation of a rule change. Under this option rather than scrutinising
the CBA for individual rules, the panel would periodically review a number of
CBA produced by the regulators. At the conclusion of this review, the panel
would provide the regulators with public recommendations for how they can
improve their overall methodology and approach to CBA. Where
appropriate, these recommendations may form the basis for updating the
regulators’ CBA frameworks (measure 12; proposed above). Such
recommendations could cover: how the regulators identify and quantify cost
and benefit, how they take into account possible market-wide effects, and
4 Where required, the RPC also performs a somewhat similar role for regulators. The FCA is required by the Small Business, Enterprise
and Employment Act 2015, as amended by the Enterprise Act 2016, to conduct Impact Assessments (IAs) on Qualifying
Regulatory Provisions (QRPs), which are reviewed by the RPC. However, these IAs are distinct from the CBA required by FSMA, and
the high threshold for QRPs means that relatively few are produced in any given year.
54
how they account for behavioural change resulting from interventions. This
could enable the CBA panel to provide more holistic comments on the
regulators’ CBAs. It would also avoid the possibility of delays to rulemaking.
The government’s view is that a “post-publication” panel would provide
long-term improvement to the regulators’ overall approach to CBA.
6.30 The government considers that the proposed CBA panel can play an
important role in improving the production of regulators’ CBA. The
government also considers that it can increase stakeholders’ confidence that
there is regular, independent input into the regulators’ CBA. These two
outcomes should be achievable with either of the possible roles of the panel,
pre- or post-publication, and the government recognises the value of both
proposals. The government would be grateful for stakeholder views on
which of the possible roles of the panel would be preferable.
Question 8: Should the role of the new CBA Panel be to provide pre-publication
comment on CBA, or to provide review of CBA post-publication?
Regulators’ review of their rules 6.31 It is important to review policy interventions after implementation to ensure
they remain appropriate and have had the desired effect. This can range
from monitoring to wider evaluation of the impact of a rule after a certain
period. In recent years the principle of reviewing regulation after it has been
in operation has been embedded in government legislative initiatives. The
government’s approach to post-legislative scrutiny, published in 2008,
contains a commitment for departments to produce memoranda on
appropriate Acts, so that Parliamentary select committees may decide
whether to conduct further post-legislative scrutiny.5 The government’s
consultation on ‘Reforming the framework for better regulation’ (which
closed on 1 October 2021) is also considering how the reviews conducted
under requirements to review legislation - contained in the Small Business,
Enterprise, and Employment Act 2015 - might be strengthened.6
6.32 The regulators already make use of similar reviews in a number of areas. In
the previous consultation for the FRF Review, the government set out that
more routine use of reviews by the regulators might be expected to help
ensure that regulatory rules remain appropriate and have had the desired
effect. At the same time, the government recognised that more regular
reviews will have resource implications and could divert the regulators’
attention from other important tasks, as well as potentially introducing
greater burden for industry, for example if additional data is required from
industry to conduct these reviews.
6.33 The benefits of an established review process are that it will:
• contribute to managing risk and uncertainty (of the intervention and
its implementation)
5 Post-legislative Scrutiny – The Government’s Approach, Office of the Leader of the House of Commons, March 2008.
6 Reforming the framework for better regulation, Department for Business, Energy, and Industrial Strategy, July 2021.
55
• improve current interventions by providing the evidence to make better
decisions
• develop a better understanding of what works, for whom and when,
and generate evidence for future policymaking
• make the timing and conduct of reviews more predictable for
stakeholders
6.34 Undertaking regular and predictable reviews of regulations is important for
building confidence amongst stakeholders, who can see that the regulators
are actively working to understand the effects of, and improve, regulation.
As noted earlier in this chapter, the regulators do review their regulatory
policies and the FCA publishes its framework for Ex post impact evaluation,7
which focuses on quantifying the impact of significant or novel measures
after implementation. However, there are no public frameworks outlining
other forms of review, such as monitoring. This leaves the review process
potentially opaque to stakeholders and, as evidenced by some consultation
responses, the result is that stakeholders are unsure of when to expect
reviews and what to expect of the review process.
Measure 13: Requirement for the regulators to publish and maintain a framework for reviewing their rules 6.35 The government proposes a new statutory requirement for the PRA and the
FCA to publish and maintain a framework for how they conduct rule reviews.
The government expects this would cover all approaches to assessing the
effect of rules, from monitoring to wider evaluation of the impact. This will
allow stakeholders to be more confident that regulators’ review of rules is
based on consistent, publicly available standards. It will also incentivise the
regulators to clearly systematise their review process as a part of setting it
out.
6.36 The government proposes that the content of the framework would be left
for the regulators to develop, given their expertise, and to ensure flexibility in
their operations. However, the government proposes requiring that the
framework includes:
• any differences in the purpose of reviews, and what different types of
review entail
• criteria for deciding which type of review is used
• criteria for deciding when each type of review will be conducted
6.37 The main purpose of the framework is to encourage systematisation of
regulators’ review of rules and provide clarity and transparency for
stakeholders on how and when rules are reviewed. This will allow
stakeholders to be confident that reviews are happening regularly and in a
consistent manner, increasing confidence in regulation.
7 Ex post impact evaluation framework, Financial Conduct Authority, December 2018.
56
Question 9: Do you agree that the proposed requirement for regulators to publish
and maintain frameworks for how the regulators review their rules provides
improved transparency for stakeholders?
Alternative proposals 6.38 Some respondents recommended the creation of an external body to provide
additional independent challenge to the regulators and scrutiny of final
rules. Proposals differed on whether this would be a body explicitly
supporting the relevant Parliamentary committee, or an entirely stand-alone
body. In both cases it was suggested this body could enhance Parliamentary
scrutiny of proposals by issuing independent reports (at public consultation
stage) on whether the regulators’ proposals are likely to advance their
objectives. The practical obstacles to be overcome in making such a body
operate effectively are substantial, and there would be significant cost and
resource burdens. Such a body would also duplicate existing functions and
potentially undermine the regulators’ operational independence.
6.39 The government considers that the existing avenues for stakeholders to
provide input, feedback, and challenge through public consultation, as well
as the role of HM Treasury and Parliament in assessing whether the
regulators are advancing their objectives, remain the appropriate
accountability mechanisms. This position is supported by the Treasury Select
Committee (TSC) report on The Future Framework for Regulation of Financial
Services, which said ‘the creation of a new independent body to assess
whether regulators were fulfilling their statutory objectives would not
remove the responsibility of [the TSC] to hold the regulators to account, and
it would also add a further body to the financial services regulatory regime
which [the TSC] would need to scrutinise’.8 Therefore, the government does
not propose the creation of an external scrutiny body.
6.40 Some respondents also noted that judicial review is not frequently utilised by
firms, and that an alternate dispute resolution mechanism should be
established to provide firms a route to challenge decision making. The
government considers that there is a risk that such a mechanism could
undermine the regulators’ independence if a non-judicial body could
mandate them to change their rules. The creation of a new dedicated
dispute resolution body would require significant resourcing and would
duplicate many of the functions of judicial review, which remains open to
industry participants where they wish to challenge regulator decision-
making.
6.41 As set out earlier, in Chapter 4, the government’s proposed power for HM
Treasury to order a rule review is intended to offer a mechanism for
mandating a review of regulator rules when it is in the public interest, while
maintaining the operational independence of the regulators. Along with the
proposed framework for rule review to be published by regulators, the
government considers these proposals address these concerns.
8 The Future Framework for Regulation of Financial Services, House of Commons Treasury Committee, July 2021, page 28.
57
Chapter 7
A comprehensive FSMA model
7.1 This chapter describes the set of changes which will be necessary to move to
a comprehensive FSMA model of regulation in areas which are currently
covered by retained EU law. This aims to establish a more agile regulatory
framework for the future, with the expert and independent regulators able
to determine the direct regulatory requirements that apply to firms.
7.2 In a statement in the House of Lords on 16 September 2021, Lord Frost
announced a review into retained EU law, to consider both its status in UK
law, and its practical effect. HM Treasury is working closely with the Cabinet
Office to ensure the Future Regulatory Framework (FRF) Review is consistent
with this wider review.
Revoking retained EU law 7.3 Direct regulatory requirements are the obligations that firms must follow, for
example a requirement to hold a certain level of capital; to act in a particular
way, such as provide certain information to a customer; or refrain from
acting in a certain way or from undertaking a particular activity. In order to
move to a comprehensive FSMA model of financial services regulation, the
government intends to ensure that the financial services regulators have the
ability to determine the direct regulatory requirements which are currently
set out in retained EU law, just as they already do in other areas not covered
by retained EU law.
7.4 Conferring this responsibility on the financial services regulators will ensure
that there is a consistent approach taken to financial services regulation
across UK markets, allowing the development of coherent and user-friendly
rulebooks. It will allow regulation to be agile and responsive to future
developments and technologies, while maintaining the UK’s high standards
of regulation.
7.5 In order to confer this responsibility on the regulators, it will be necessary to
repeal a significant amount of retained EU law that currently contain many
of these direct regulatory requirements.
7.6 The government will ensure that the deletion of retained EU law happens in
a way that maintains continuity. Any particular piece of retained EU law will
not cease to have effect until the regulator rules which replace it are in place
– or it has been determined that it is appropriate. The government is
committed to high regulatory standards, while making the most of this
opportunity to do things differently and better. In many cases, it may be
58
appropriate for the regulators to ensure continuity with the current
provisions in retained EU law. However, there will also be instances where it
is appropriate for the regulators to take the opportunity to tailor the rules to
reflect the specifics of UK markets, and to make targeted improvements, in
line with their objectives.
Measure 14: A power to repeal parts of retained EU law, including the direct regulatory requirements that apply to firms 7.7 The government intends, as a general approach, to take a power to repeal
retained EU law, which it will use to repeal the direct regulatory
requirements which apply to firms. This repeal will enable the appropriate
regulator to replace those provisions with their own rules. The repeal will
take effect at the same time as the regulators’ new rules come into force, to
avoid any “gap” in regulation.
7.8 This process – of repealing the relevant retained EU law and concurrently
replacing it with the appropriate regulator rules – will take place over a
number of years. The government and the regulators will work together
closely on this, to ensure that there is a clear and transparent approach to
transition, that provides continuity and stability and appropriately manages
any impact on firms or consumers that would result from the changes.
7.9 At a minimum, the government proposes that the ability to repeal retained
EU law should extend to:
• all EU Regulations and decisions related to financial services which are
retained EU law by virtue of section 3 of the EUWA
• all statutory instruments made under the European Union
Communities Act 1972 (ECA) which are relevant to financial services,
and statutory instruments made under other empowerments which
implemented EU obligations relating to financial services
• all EUWA statutory instruments relevant to financial services
• all instruments made under specific empowerments contained in
legislation of the type specified above
7.10 A number of responses to the previous consultation stressed the extent to
which FSMA itself has been increasingly altered in order to implement EU
law, and suggested that this will require some changes to the parts of FSMA
that have been affected by this. For example, Part 18 of FSMA was
substantially reformed following the adoption of EU legislation. Where
retained EU law is set out in elements of domestic primary legislation related
to financial services, the government proposes that it should also have the
ability to amend or repeal the relevant provisions, in order to deliver a
coherent regulatory framework.
7.11 There may be other elements of retained EU law that are not direct
regulatory requirements, but which nevertheless should be repealed in order
to facilitate regulator rulemaking. These include:
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• areas which duplicate existing domestic requirements
• areas which set out unnecessary process, which may unduly restrict the
scope that the regulators have for independent action
• areas in retained EU law which give the regulators narrowly defined
powers, where these are already covered by the rulemaking powers
that FSMA gives to the regulators.
Designated Activities Regime 7.12 Many activities covered by retained EU law are also regulated activities under
the RAO. This means that the full FSMA framework already applies, including
a general rulemaking power for the Prudential Regulation Authority (PRA)
and the Financial Conduct Authority (FCA) in relation to authorised persons,
unless a firm is exempt.1 The regulators already have sufficient powers
to establish direct regulatory requirements for firms, where they are
authorised persons, and they act within the established FSMA framework.
This framework gives the regulators the power to make rules, but also sets
the wider regulatory architecture such as supervision, enforcement, and
consultation.
7.13 As a result, in those areas already covered by the core FSMA authorisation
regime, no significant additional rulemaking powers will be required to allow
the regulators to replace retained EU law that is to be repealed. The
government considers that the regulated activities arrangements, and the
RAO process, work well. Accordingly, the government does not propose
amending these arrangements in any substantive way.
7.14 However, there are many pieces of retained EU law which set the rules for a
kind of activity, product, or conduct which are not FSMA regulated activities,
and which apply to a broader range of entities than FSMA authorised
persons. As a result, the general rulemaking powers of the PRA and the FCA
in relation to authorised persons does not currently apply.
7.15 Some examples include the Short Selling Regulation, which sets out the rules
which apply to the activity of short selling, or margin rules that apply
to certain types of derivative transactions, which set out how firms engaged
in this activity should mitigate the risk posed by these type of contracts.
7.16 Many of these activities came to be subject to EU law as a response to
the global financial crisis, when policy makers sought to introduce
standardised rules across a number of different activities, even where those
activities may be carried out by some firms which may not consider
themselves to be “financial services” firms at all. It is right that these
activities continue to be subject to regulation by the financial services
regulators, as activities outside the core financial services perimeter can often
have an impact on financial markets and consumers.
1 In some instances, a firm can be exempted from the requirement to become an authorised person in order to carry out a regulated
activity.
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7.17 Including all these activities within the perimeter set by the RAO, and making
them subject to the general prohibition in section 19 of FSMA, would have
the effect of requiring every person who carries out these activities and who
is not an exempt person to become an authorised person. This would not be
a proportionate approach.
7.18 For example, a large number and wide range of businesses across the
economy enter into derivatives contracts. They are often used by firms to
manage the risk of price fluctuations. These firms can be complex financial
services firms or non-financial businesses operating in the real economy.
For example, a car manufacturer may enter into metal derivative contracts as
a way of protecting itself against a rise in the price of the metals that it
needs to purchase. In most instances under retained EU law, firms that enter
into derivative contracts which are not cleared in a central counterparty
(CCP) must exchange a certain amount of “margin” or collateral in order to
reduce the impact if one party is not able to meet its obligations in that
contract. The government agrees that such activities should remain subject
to an appropriate level of regulation. However, it would not be
proportionate to make entering into these derivative contracts a regulated
activity, because it would require all entities that wish to use these contracts
to apply for authorisation from the FCA, with all of the additional obligations
that would entail.
Measure 15: To create a new Designated Activities Regime, to enable to the regulators to make rules for such activities 7.19 To ensure that these activities can continue to be regulated in a
proportionate manner that is consistent with the existing FSMA framework,
the government proposes to create a new Designated Activities Regime
(DAR).
7.20 The DAR will be a mechanism to allow the regulation of certain activities
outside the FSMA authorisation process. This will mirror the existing
approach for the RAO: the government will determine the activities that are
in scope via secondary legislation (within a framework established in primary
legislation) and this will empower the regulators to determine the rules that
will regulate these activities.
7.21 However, the DAR would be subject to a more limited rulemaking power
than the general rulemaking powers in relation to authorised persons. It
would allow the relevant regulator to make rules relating to the designated
activity only, and not other unrelated activities of the firm. This reflects the
fact that this is designed to be a more limited regime, relating to the
designated activities only (and not the wider activities of those who carry out
designated activities). This reflects the risk that activities outside the core
financial services perimeter can often have on financial markets and
consumers.
7.22 Persons carrying out a specific activity would be required to follow the
regulators’ rules relating to that activity, and there would be appropriate
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enforcement mechanisms and penalties for failure to comply with the
relevant rules.
7.23 The government proposes that the framework within which the regulators
must operate when establishing these rules should be closely based on the
provisions in FSMA, which already has well established provisions to address
information gathering, enforcement, supervision, consultation etc. These
provisions are currently spread out across different instruments and regimes,
and bringing them into a coherent framework under FSMA will simplify the
procedures and powers available to the regulators to administer the DAR.
7.24 Each set of regulations currently set out in retained EU law performs a
different function. As a result there should be a means for HM Treasury to
modify the application of the core DAR framework for certain activities, or to
add additional elements, in order to ensure that this regime is capable of
recreating the core elements of the existing EU regimes, at a minimum. For
example, it may be appropriate to require one regulator to consult another
in particular circumstances.
Box 7.A: The RAO and the DAR
7.25 The government intends to use the DAR, where appropriate, to replicate the
existing scope of regulation, and therefore bring the activities currently
covered by retained EU law into this new kind of FSMA regulation. However,
the government does not intend to restrict the DAR to retained EU law only.
It will be possible to designate, in the future, other activities if necessary. This
will ensure that the framework can adapt to future developments – for
example, new types of activity, or where the risks associated with a particular
activity change in a way that merits bringing it within scope of regulation.
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Question 10: Do you agree with the government’s proposal to establish a new
Designated Activities Regime to regulate certain activities outside the RAO?
Bringing FMIs covered by retained EU law into FSMA regulation 7.26 The DAR will not be an appropriate approach to all areas of retained EU law
that currently sit outside the core FSMA authorisation framework. There are
a small number of areas where retained EU law applies to entities which are
systemic to the financial system, or which play a unique or essential role in
markets, but which currently sit outside of the core FSMA authorisation
regime. In particular, this includes certain types of Financial Market
Infrastructure (FMI).2
7.27 The government does not believe that the DAR, described above, would be
suitable for such firms. This is because the regimes which have been
established to regulate these entities typically require a firm to go through a
recognition process or otherwise become registered with the relevant
regulator in order to carry out certain activities. While the exact processes
differ in each regime, these recognition regimes have similarities (both in
purpose and process) to the authorisation process that firms must go
through in order to carry out regulated activities under FSMA.
7.28 When incorporating these regimes into UK law, the UK kept these regimes
outside the core FSMA authorisation framework. There may be some cases
where it would be appropriate for HM Treasury to specify that FMIs’ activities
are regulated activities, bringing them within the core FSMA framework.
However, this is unlikely to be an appropriate approach in all cases and may
require complicated amendments to the core FSMA authorisation regime.
7.29 The reason for this is that many FMIs provide a very wide range of activities
as part of their unique function, but they often perform these activities for
different reasons than other types of financial services firm. For example, a
central counterparty may undertake some investment services simply in order
to manage the risk it faces as a result of offering clearing services, not
because it wishes to offer investment services to clients. And so the general
requirements in FSMA may not be the most appropriate framework for
regulating these firms effectively. As a result, a number of FMIs have
previously been exempted from the FSMA authorisation framework even
when they are carrying out regulated activities. This is the case for
Recognised Investment Exchanges, for example.
7.30 In all instances, the government must ensure that the regulators are given
sufficient rulemaking powers to enable them to make rules replacing the
direct regulatory requirements which currently apply to firms under retained
EU law. However, due to the systemic and unique nature of these firms, and
the wide variety of different EU regimes that underpin them, this is likely to
require more detailed solutions in order to give the regulators appropriate
2 There is no universally agreed definition of an FMI, but the term is used here to mean: recognised investment exchanges (RIEs);
various entities offering payment services; payment systems; trade repositories (TRs); credit rating agencies (CRAs); central
counterparties (CCPs); and central securities depositories (CSDs).
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rulemaking powers, and set the appropriate frameworks within which the
rules might operate. For example:
• trade repositories (TRs) and credit rating agencies (CRAs): The FCA has
a general rulemaking power in relation to Trade Repositories and
another general rulemaking power in relation to CRAs, which were
both created using powers in the EUWA,3 in order to prepare for EU
exit. These currently sit separately from the general rulemaking power
in FSMA. The government considers that these powers will be needed
on an ongoing basis, to ensure the effective regulation of these
important firms. The government therefore intends to put these
general rulemaking powers on an appropriate statutory footing
• recognised investment exchanges (RIEs): The FCA already has specific
rulemaking powers over RIEs, and has established a robust recognition
regime. Where needed, the government will ensure that the FCA has
the necessary additional powers to replace the direct regulatory
requirements in retained EU law
• various entities related to payments and e-money: there are various
types of entity performing payment or e-money services, and the
supervisors have a number of regulatory powers in relation to them.
Where these existing powers are not sufficient, the government will
ensure that they have the necessary additional powers to replace the
direct regulatory requirements in retained EU law.
Central counterparties and central securities depositories 7.31 The Bank of England is responsible for the regulation and supervision of
CCPs and central securities depositories (CSDs), due to the fact that these
FMIs are essential to the stability of the financial system.4 The Bank of
England carries out this responsibility as part of its overall statutory objective
to protect and enhance the stability of the UK financial system.
7.32 However, the Bank of England has very limited rulemaking powers over CCPs
and CSDs, since prior to EU exit the regulations relating to them were largely
set at EU level through the European Market Infrastructure Regulation5 and
the Central Securities Depositories Regulation,6 with the Bank of England
responsible for supervision and enforcement of the EU regulations in the UK.
At a minimum, the government must ensure that the Bank of England has
the relevant powers to replace all these provisions in retained EU law relating
to the regulation of CCPs and CSDs.
3 Regulation 3, the Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019; and regulation 74, the Over the Counter
Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations
2019.
4 The Bank of England is also responsible for regulating recognised clearing houses (RCHs). However, there are currently no RCHs
which are not also CCPs in the UK.
5 Regulation (EU) No 648/2012
6 Regulation (EU) No 909/2014
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7.33 But it is also important that the Bank of England has an effective way to
uphold and enhance standards for CCP and CSD regulation, including a
means to make new rules for these firms, to address emerging risks and keep
pace with international standards.
7.34 The government is therefore considering granting the Bank of England a
general rulemaking power in relation to CCPs and CSDs so that it can set
appropriate rules for these firms. Such a new power, and the associated
broader responsibility, will be accompanied by appropriate enhancements or
additions to the Bank of England’s current framework of objectives and
accountability in relation to the regulation and supervision of these entities.
7.35 The UK is home to a global clearing market used by market participants from
around the world. Any enhancements to the existing framework governing
the way the Bank of England exercises its responsibilities over CCPs and CSDs
would need to reflect not only the vital domestic importance of these firms,
but also the effect they can have on the global financial system as well as the
role they play in safeguarding global financial and monetary stability. The
government will set out further details in due course.
Activity-specific have regards and obligations 7.36 The previous consultation for the FRF Review considered ‘Activity-Specific
Legislation’ to provide additional public policy input into regulators’
rulemaking in specific areas. This proposal was designed to enable the
government to set out specific duties and policy considerations that the
regulators should have regard to when making rules in a specific area.
Measure 16: The ability to establish activity-specific ‘have regards’ and obligations 7.37 In some instances, it may be necessary to require the regulators to consider
specific aspects of public policy which are not generally applicable and so are
not captured by the objectives and principles which the regulators already
have. Some of the detailed rules in retained EU law were specifically drafted
to address certain public policy points which are still relevant. If these rules
are updated in the regulators’ rulebooks in the future, it is right that the
regulators should continue to have those public policy priorities in mind.
7.38 The Financial Services Act 2021 included a small number of considerations
which the PRA is required to “have regard” to when making its rules to
implement the Basel standards, and a similar but separate list to which the
FCA must have regard to when making rules to introduce an Investment
Firms Prudential Regime. For example, the PRA is required to have regard to
relevant standards recommended by the Basel Committee on Banking
Supervision. The government considers that this model could have benefits
when applied more widely to some parts of the regulatory framework.
7.39 However, the government is mindful that it is important to maintain a
sensible balance between cross-cutting and activity-specific regulatory
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principles. Where policy considerations are relevant to many areas of
regulation, these will be reflected in cross-cutting regulatory principles, in
line with Chapter 3 of this consultation. The regulators’ must have regard to
these considerations across the full range of their responsibilities.
7.40 Therefore the government proposes to have an ability to set specific “have
regards” which the regulators must consider when exercising their rules in
specific areas of regulation. For example, the government may set “have
regards” for the FCA when it is making rules in relation to uncleared
derivatives.
7.41 When making rules, the regulators must act in a way that advances their
statutory objectives. The government believes that it is generally appropriate
for the regulators to make their own judgement about what rules are
required, based on their objectives and on the regulatory perimeter
established by HM Treasury. However, in response to the previous
consultation, some stakeholders suggested that there should be a means for
government and Parliament to require the regulators to make rules covering
certain matters, to ensure important wider public policy concerns are
addressed.
7.42 The government agrees that there are some areas where it is appropriate to
put an obligation on the regulators to exercise their rulemaking powers in a
way that imposes certain types of requirements on firms. Section 143C of
FSMA, inserted by Schedule 2 to the Financial Services Act 2021, provides an
example of this: it requires that the FCA “must make rules applying to FCA
investment firms” that impose certain types of prudential requirements.
7.43 The government therefore proposes to take a power to place obligations on
the regulators to make rules in relation to specific areas of regulation. This
could be necessary in areas where retained EU law will be repealed and the
government believes it is essential that there are similar provisions in the
regulators’ rulebooks. This would mean, for example, that HM Treasury
could put an obligation on the FCA to use their rulemaking power to make
rules relating to the reporting of financial transactions.
7.44 It would not be possible to use this power to impinge on the regulators’
independence by seeking to influence what those rules should be. The
regulators could not be required to act in a way that is inconsistent with
their objectives.
7.45 The government expects that the ability to set “have regards” and to put an
obligation on the regulators to make rules in relation to specific areas should
at a minimum extend to any areas currently covered by retained EU law. As
retained EU law is deleted from the UK statute book, the government is
committed to ensuring a coherent approach. This means avoiding creating a
distinction between regulations that were once part of retained EU law, and
regulations that weren’t. The government will therefore continue to consider
the appropriate scope of the powers to make “have regards”.
Question 11: Do you agree with the government’s proposal for HM Treasury to have
the ability to apply ‘’have regards’’ and to place obligations on the regulators to
make rules in relation to specific areas of regulation?
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Revocation and amending retained EU law for purposes other than regulator rulemaking 7.46 As set out above, the government intends to take a power to repeal the
direct regulatory requirements that apply to firms in retained EU law, so that
the regulators can determine the direct regulatory requirements on firms in
their rulebooks.
7.47 However, there are also a number of provisions in retained EU law which do
not set direct regulatory requirements on firms. These provisions form the
wider “regulatory architecture” that establishes the regulatory regimes. For
example, these provisions set out how certain rules should be supervised or
enforced, and the powers that the regulators may have to do so.
7.48 Deleting significant parts of retained EU law is a complex task, and is likely to
require a number of other changes in order to keep this regulatory
architecture functioning effectively.
7.49 In some instances, the government will require the ability to amend retained
EU law directly in order to bring it into alignment with the FSMA framework
and ensure that it can be kept up to date. This is particularly the case where
retained EU law has been incorporated into existing domestic legislation.
This ability will be needed to ensure that the legislation can be kept up to
date, especially where retained EU law does not contain many direct
regulatory requirements but instead relates to the actions of the regulators –
for example, the legislation establishing the bank resolution regime.
7.50 The government will therefore ensure that the legislation that will be
brought forward enables the necessary amendments to be made to retained
EU law, and to allow for consequential changes to ensure coherence and the
continued effective operation of FSMA and other relevant legislation, which
will enable the deletion of direct regulatory requirements.
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Process for moving to a comprehensive FSMA model
Box 7.B: Chart describing the process to replace retained EU law with regulator rules
7.51 The process of moving from retained EU law to a comprehensive FSMA
model of regulation will be a significant undertaking, and will take a number
of years. There are hundreds of pieces of retained EU law relating to financial
services, and some of the most detailed pieces can be several hundred pages
long. Following the delivery of the powers proposed in this chapter, a
subsequent programme of secondary legislation will be required to give
effect to the changes. This means that Parliament will have the opportunity
to scrutinise the legislation which enables these changes, and subsequently,
the statutory instruments giving effect to these changes. The government
and the regulators will work together closely on this, to ensure that there is a
clear and transparent approach to transition, that provides continuity and
stability and appropriately manages any impact on firms or consumers that
would result from the changes.
7.52 This process will involve government identifying the areas of retained EU law
which need to be repealed, and putting in place any necessary “have
regards” and obligations through secondary legislation.
7.53 The government and the regulators will ensure that there is sufficient time
for HM Treasury and the regulators to consult where necessary, and that
there is a sufficient time for firms to adapt to any rule changes before they
are applied.
7.54 In many instances, the government would expect the regulators to initially
replace the repealed provisions with rules that are similar to those which are
already in place. However, this approach will allow the regulators to ensure
that the rules are properly tailored for the UK markets, and appropriately
reflect their objectives. It will also mean that the rules can be more efficiently
updated in the future, for example in response to new global standards, or
to take account of new business models. The government and the regulators
recognise the importance of providing stability and continuity for firms and
their customers by avoiding unnecessary changes.
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Chapter 8
Responding to this consultation and next steps
8.1 This consultation will remain open for three months, closing on 9 February
2022. HM Treasury are inviting stakeholders to provide responses to the
questions set out below and share their views on the proposals for how the
government intends to take forward its approach to the FRF Review.
Box 8.A: Questions for consultation respondents
1. Do you agree with the government’s approach to add new growth
and international competitiveness secondary objectives for the PRA
and the FCA?
2. Do you agree that the regulatory principle for sustainable growth
should be updated to reference climate change and a net zero
economy?
3. Do you agree that the proposed power for HM Treasury to require the
regulators to review their rules offers an appropriate mechanism to
review rules when necessary?
4. Do you agree with the proposed approach to resolve the interaction
between the regulators’ responsibilities under FSMA and the
government’s overseas arrangements and agreements?
5. Do you agree that these measures require the regulators to provide
the necessary information to Parliament on an appropriate statutory
basis to conduct its scrutiny?
6. Do you agree with the proposals to strengthen the role of the panels
in providing important and diverse stakeholder input into the
development of policy and regulation?
7. Do you agree that the proposed requirement for regulators to publish
and maintain frameworks for CBA provides improved transparency for
stakeholders?
8. Should the role of the new CBA Panel be to provide pre-publication
comment on CBA, or to provide review of CBA post-publication?
9. Do you agree that the proposed requirement for regulators to publish
and maintain frameworks for how the regulators review their rules
provides improved transparency to stakeholders?
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10. Do you agree with the government’s proposal to establish a new
Designated Activities Regime to regulate certain activities outside the
RAO?
11. Do you agree with the government’s proposal for HM Treasury to have
the ability to apply “have regards” and to place obligations on the
regulators to make rules in relation to specific areas of regulation?
Who should respond? 8.2 A wide range of stakeholders will be interested in the important issues
presented in this document. Responses are welcome from all stakeholders,
including:
• financial services institutions and firms
• other businesses impacted by financial services regulation
• trade associations and representative bodies
• consumer groups
How to submit responses 8.3 Please submit your responses to [email protected], or post to:
Future Regulatory Framework Review
Financial Services Strategy
HM Treasury
1 Horse Guards Road
SW1A 2HQ
Next steps 8.4 This document sets out the government’s response to the feedback received
in response to the previous consultation and a series of proposals for how
the government intends to take forward its approach to the FRF Review,
including:
• the changes needed to the regulators’ statutory objectives and
principles to ensure the government’s priorities and objectives for the
sector are fully reflected across the breadth of the regulators’
responsibilities
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• the proposals for ensuring that accountability, scrutiny and
engagement arrangements with HM Treasury, Parliament, and
stakeholders are appropriate given the regulators’ responsibilities, and;
• The proposed approach to returning responsibility for designing and
implementing the direct requirements that apply to firms in certain
areas of retained EU law to the regulators within a system established
by government and Parliament
8.5 The government will take into account stakeholder views and respond to this
consultation in due course.
HM Treasury Future Regulatory Framework (FRF) Review 2021 Consultation: Processing of Personal Data 8.6 This notice sets out how HM Treasury will use your personal data for the
purposes of the Future Regulatory Framework Review 2021 consultation and
explains your rights under the UK General Data Protection Regulation (UK
GDPR) and the Data Protection Act 2018 (DPA).
Your data (Data Subject Categories) 8.7 The personal information relates to you as either a member of the public, a
parliamentarian, or a representative of an organisations or company.
The data HM Treasury collect (Data Categories) 8.8 Information may include your name, address, email address, job title, and
employer, as well as your opinions. It is possible that you will volunteer
additional identifying information about yourself or third parties.
Legal basis of processing 8.9 The processing is necessary for the performance of a task carried out in the
public interest or in the exercise of official authority vested in HM Treasury.
For the purpose of this consultation the task is consulting on departmental
policies or proposals or obtaining opinion data in order to develop good
effective government policies.
Special categories data 8.10 Any of the categories of special category data may be processed if such data
is volunteered by the respondent.
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Legal basis for processing special category data 8.11 Where special category data is volunteered by you (the data subject), the
legal basis relied upon for processing it is: the processing is necessary for
reasons of substantial public interest for the exercise of a function of the
Crown, a minister of the Crown, or a government department.
8.12 This function is consulting on departmental policies or proposals, or
obtaining opinion data, to develop good effective policies.
Purpose 8.13 Personal information is processed for the purpose of obtaining the opinions
of members of the public and representatives of organisations and
companies, about departmental policies, proposals, or generally to obtain
public opinion data on an issue of public interest.
Who HM Treasury share your responses with 8.14 As part of policy development, HM Treasury may share full responses to this
consultation, including any personal data provided (such as your name and
email address) with the Financial Conduct Authority (FCA), Prudential
Regulation Authority (PRA) and Bank of England.
8.15 Information provided in response to a consultation may be published or
disclosed in accordance with the access to information regimes. These are
primarily the Freedom of Information Act 2000 (FOIA), the Data Protection
Act 2018 (DPA) and the Environmental Information Regulations 2004 (EIR).
8.16 If you want the information that you provide to be treated as confidential,
please be aware that, under the FOIA, there is a statutory code of practice
with which public authorities must comply and which deals with, amongst
other things, obligations of confidence.
8.17 In view of this it would be helpful if you could explain to HM Treasury why
you regard the information you have provided as confidential. If HM
Treasury receive a request for disclosure of the information HM Treasury will
take full account of your explanation, but HM Treasury cannot give an
assurance that confidentiality can be maintained in all circumstances. An
automatic confidentiality disclaimer generated by your IT system will not, of
itself, be regarded as binding on HM Treasury.
8.18 Where someone submits special category personal data or personal data
about third parties, HM Treasury will endeavour to delete that data before
publication takes place.
8.19 Where information about respondents is not published, it may be shared
with officials within other public bodies involved in this consultation process
to assist HM Treasury in developing the policies to which it relates. Examples
of these public bodies appear at:
https://www.gov.uk/government/organisations.
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8.20 As the personal information is stored on HM Treasury’s IT infrastructure, it
will be accessible to HM Treasury’s IT contractor, NTT. NTT will only process
this data for HM Treasury’s purposes and in fulfilment with the contractual
obligations they have with HM Treasury.
8.21 At a future date, HM Treasury may decide to publish summarised and/or
anonymised versions of responses to this consultation document as part of a
second consultation.
How long HM Treasury will hold your data (retention) 8.22 Personal information in responses to consultations will generally be
published and therefore retained indefinitely as a historic record under the
Public Records Act 1958.
8.23 Personal information in responses that is not published will be retained for 3
calendar years after the consultation has concluded.
Your rights 8.24 You have the right to request information about how your personal data are
processed and to request a copy of that personal data.
8.25 You have the right to request that any inaccuracies in your personal data are
rectified without delay.
8.26 You have the right to request that your personal data are erased if there is
no longer a justification for them to be processed.
8.27 You have the right, in certain circumstances (for example, where accuracy is
contested), to request that the processing of your personal data is restricted.
8.28 You have the right to object to the processing of your personal data where it
is processed for direct marketing purposes.
8.29 You have the right to data portability, which allows your data to be copied
or transferred from one IT environment to another.
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How to submit a Data Subject Access Request (DSAR) 8.30 To request access to personal data that HM Treasury holds about you,
contact:
HM Treasury Data Protection Unit
G11 Orange
1 Horse Guards Road
London
SW1A 2HQ
Complaints 8.31 If you have any concerns about the use of your personal data, please contact
HM Treasury via this mailbox: [email protected].
8.32 If HM Treasury is unable to address your concerns to your satisfaction, you
can make a complaint to the Information Commissioner, the UK’s
independent regulator for data protection. The Information Commissioner
can be contacted at:
Information Commissioner's Office
Wycliffe House
Water Lane
Wilmslow
Cheshire
SK9 5AF
0303 123 1113
8.33 Any complaint to the Information Commissioner is without prejudice to your
right to seek redress through the courts.
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Contact details 8.34 The data controller for any personal data collected as part of this
consultation is HM Treasury, the contact details for which are:
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ
London
020 7270 5000
The contact details for HM Treasury’s Data Protection Officer (DPO) are:
The Data Protection Officer
Corporate Governance and Risk Assurance Team
Area 2/15
1 Horse Guards Road
London
SW1A 2HQ
London
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E02690955
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